UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2005
------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: ___________________ to ___________________
Commission file number: 000-28399
------------------------------------------
Gaming & Entertainment Group, Inc.
--------------------------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Utah 59-1643698
------------------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6757 Spencer Street, Las Vegas, Nevada 89119
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(Address of principal executive offices)
(702) 407-2471
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(Issuer's telephone number)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 |_|
Applicable Only to Issuers Involved in Bankruptcy Proceedings During the
Preceding Five Years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. YES |_| NO |X|
Applicable Only to Corporate Issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
19,830,602 shares of common stock, $0.01 par value, as of May 16, 2005
--------------------------------------------------------------------------------
Transitional Small Business Disclosure Format (check one): YES |_| NO |X|
-1-
FORM 10-QSB
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1. FINANCIAL STATEMENTS............................................3
Condensed Consolidated Balance Sheet
March 31, 2005 (Unaudited)....................................3
Condensed Consolidated Statements of Operations
For the Three Months ended March 31, 2005
and 2004 (Unaudited)........................ .................4
Condensed Consolidated Statement of Stockholders'
Deficiency For the Three Months ended
March 31, 2005 (Unaudited)....................................5
Condensed Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2005 and
2004 (Unaudited)....................... ......................6
Notes to Condensed Consolidated Financial
Statements (Unaudited)........................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......15
Results of Operations..........................................18
Liquidity and Capital Resources................................19
Risk Factors...................................................21
ITEM 3. CONTROLS AND PROCEDURES........................................21
PART II - OTHER INFORMATION...................................................22
ITEM 1. LEGAL PROCEEDINGS..............................................22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS....22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............23
ITEM 5. OTHER INFORMATION..............................................23
ITEM 6. EXHIBITS.......................................................24
SIGNATURE.....................................................................25
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(UNAUDITED)
ASSETS
Current Assets
Cash $ 367,506
Accounts receivable 106,200
-----------
Total current assets 473,706
Equipment and Furnishings, net of accumulated depreciation of $281,123 143,335
Intangible Assets 313,500
Other Assets 10,312
-----------
Total assets $ 940,853
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 140,028
Accrued expenses 84,737
Accrued compensation - officers 70,192
Current portion of notes payable - officers 127,048
-----------
Total current liabilities 422,005
Senior secured note payable, net of unamortized debt discount of $1,035,958 714,042
Deferred rent 39,666
-----------
Total liabilities 1,175,713
-----------
Commitments
Stockholders' Deficiency
Preferred stock, par value $10 per share; 10,000,000 shares authorized
Class A convertible preferred stock, par value $10 per share;
1,000,000 shares designated; none issued --
Class B preferred stock, par value $10 per share;
1,000,000 shares designated; none issued --
Common stock, par value $.01 per share; 150,000,000 shares authorized;
19,830,602 shares issued and outstanding 198,306
Additional paid-in capital 6,556,087
Accumulated deficit (7,132,799)
Accumulated other comprehensive income - foreign currency translation gains 143,546
-----------
Total stockholders' deficiency (234,860)
-----------
Total liabilities and stockholders' deficiency $ 940,853
===========
See accompanying notes to condensed consolidated financial statements
-3-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
------------ ------------
Revenues:
Services $ 229,780 $ 28,673
Product 5,000 --
------------ ------------
Total revenues 234,780 28,673
------------ ------------
Cost of revenues:
Services 99,042 37,808
Product 5,696 --
------------ ------------
Total cost of revenues 104,738 37,808
------------ ------------
Gross margin 130,042 (9,135)
------------ ------------
Operating expenses:
Research and development 158,210 214,248
Selling, general and administrative 378,936 700,016
------------ ------------
Total operating expenses 537,146 914,264
------------ ------------
Operating loss (407,104) (923,399)
------------ ------------
Other income (expense):
Interest expense and amortization of debt discount (86,032) (23,551)
Other income 53,177 5,528
------------ ------------
Total other expense (32,855) (18,023)
------------ ------------
Net loss $ (439,959) $ (941,422)
------------ ------------
Weighted average number of shares outstanding 19,161,930 16,836,877
============ ============
Net loss per share - basic and diluted $ (0.02) $ (0.06)
============ ============
See accompanying notes to condensed consolidated financial statements
-4-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
Accumulated
Common Stock Additional Other
------------------------ Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income Total
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 1, 2005 19,017,352 $ 190,173 $ 6,300,720 $(6,692,840) $ 147,416 $ (54,531)
Shares issued in exchange or
purchase of intangible assets 250,000 2,500 125,000 -- -- 127,500
Warrants issued in exchange for
purchase of intangible assets -- -- 136,000 -- -- 136,000
Shares issued for registration late
filing 563,250 5,633 (5,633) -- -- --
Foreign currency translation loss (A)
-- -- -- -- (3,870) (3,870)
Net loss -- -- -- (439,959) -- (439,959)
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2005 19,830,602 $ 198,306 $ 6,556,087 $(7,132,799) $ 143,546 $ (234,860)
=========== =========== =========== =========== =========== ===========
(A) Comprehensive loss (net loss plus or minus foreign currency translation
loss or gain) for the three months ended March 31, 2005 and 2004 totaled
$443,829 and $981,204, respectively.
See accompanying notes to condensed consolidated financial statements
-5-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- -----------
Cash flows from operating activities
Net loss $ (439,959) $ (941,422)
Adjustments to reconcile net loss to net cash used in operating activities:
Recoveries of loan and note receivable and provision for bad debts -- (2,419)
Amortization of debt discount 55,517 --
Depreciation expense 23,319 7,079
Options and warrants issued to nonemployees for services -- 175,088
Deferred rent (8,099) --
Changes in operating assets and liabilities:
Accounts receivable 74,948 --
Prepaid expenses -- (20,290)
Accounts payable 11,982 (13,979)
Accrued expenses 34,874 (50,649)
Accrued compensation - officers (5,005) (71,559)
Foreign taxes payable (166,009) --
----------- -----------
Net cash used in operating activities (418,432) (918,151)
----------- -----------
Cash flows from investing activities
Acquisition of intangible assets (50,000) --
Acquisition of equipment and furnishings (4,413) (2,153)
----------- -----------
Net cash used in investing activities (54,413) (2,153)
----------- -----------
Cash flows from financing activities
Repayments of related party loans -- (457,067)
Proceeds from the issuance of senior secured note and warrants 250,000 --
Net proceeds from sale of common stock and warrants -- 1,570,000
----------- -----------
Net cash provided by financing activities 250,000 1,112,933
----------- -----------
Effect of exchange rate changes on cash (3,673) (22,123)
----------- -----------
Net increase (decrease) in cash (226,518) 170,506
Cash, beginning of period 594,024 86,315
----------- -----------
Cash, end of period $ 367,506 $ 256,821
=========== ===========
Supplemental disclosure of cash flow information
Interest paid $ 30,515 $ 23,551
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Intangible assets purchased in exchange for common stock and
warrants $ 263,500 $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements
-6-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BUSINESS AND ORGANIZATION
On or about January 12, 2004, NorStar Group, Inc., a publicly-held company
incorporated in Utah 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"); (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 treated as 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 condensed
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 at their historical basis and
the inclusion of the accounting acquiree's results of operations from that date.
As used herein, the "Company" refers to G&EG Nevada prior to January 12, 2004
and to G&EG, G&EG Nevada and their other subsidiaries from that date forward.
The Company is a developer of central server gaming systems, game content,
gaming devices for the land-based gaming markets of the United States, Canada
and Europe and Internet gaming systems for utilization in regulated gaming
markets.
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted from this report,
as is permitted by such rules and regulations; however, in the opinion of
management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position as of
March 31, 2005 and its results of operations and cash flows for the interim
periods presented. Results of operations for interim periods are not necessarily
indicative of results for the full years of which they are a part.
-7-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
The accompanying unaudited condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. As shown in the
financial statements, the Company has incurred losses of $439,959 and $941,422
and negative cash flows from operating activities of $418,432 and $918,151 for
the three months ended March 31, 2005 and 2004, respectively, and recurring
losses in prior years. As of March 31, 2005, the Company had an accumulated
deficit of $7,132,799 and a stockholders' deficiency of $234,860. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The Company's ability to continue as a going concern is dependent
upon its ability to generate sufficient cash flows from its operations or obtain
sufficient liquid resources from other sources to meet its obligations as they
become due. Through March 31, 2005, the Company has funded its operations
primarily through the issuance of common stock, warrants and options to outside
investors for cash and consultants and others for services and the issuance of
promissory notes, common stock and warrants to third parties, specifically
Cantor G&W (Nevada), L.P. ("Cantor") since September 2004. Management
anticipates that additional funding of not less than $2,500,000 will be
necessary to fund the Company's operations through March 31, 2006. It is
anticipated that the Company will procure the aforementioned funding through the
issuance of promissory notes to third parties, specifically Cantor, although
Cantor has not made any commitments to the Company in this regard. Management
believes, but cannot assure, that the Company will be able to obtain such
financing and continue its operations through at least March 31, 2006. If the
Company is not able to obtain adequate financing, it may have to curtail or
terminate some, or all, of its operations. The accompanying unaudited condensed
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classifications of liabilities that might be necessary in the event the Company
cannot continue as a going concern.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of G&EG
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Revenue Recognition
Revenues from the enhancement, maintenance and technical support of Internet
gaming sites in regulated gaming markets, in relation to the software
development previously performed, are recognized as the services are performed,
or if no pattern of performance is discernable, on a straight-line basis over
the period in which the services are performed.
Revenues from fixed price Internet gaming site development contracts in
regulated gaming markets, in relation to software development specifically
performed for each respective client, will be recognized using the percentage of
completion method of accounting with labor hours as the basis for measurement of
progress toward completion of the contracts. Revenues from time and material
contracts are recognized at the contractual rates as labor hours are delivered
and direct expenses are incurred.
-8-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
Revenues from online gaming software license fees, in relation to the
utilization of the G&EG proprietary gaming platform, will be recognized as
earned over the term of the agreement. When the Company receives a percentage of
the gaming revenues generated by its client's Internet gaming sites, it will
recognize such revenues based upon a percentage of the gross win when earned.
When Company owned gaming machines are leased to a customer, revenues from the
placement of gaming machines on a revenue-sharing basis, as well as the
placement of a central server gaming system on a license basis, in relation to
the certain percentage of the client's gross win and utilization of the G&EG
proprietary gaming platform, will be recognized on a straight-line basis over
the term of the lease.
Revenue from gaming machines that are sold will be recognized upon completion of
installation and acceptance by the casino, provided collectibility is reasonably
assured. Revenues generated under revenue-sharing contracts will be negotiated
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 and will be recognized as revenue as these amounts are earned.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), provides for the use of a fair value based method of
accounting for employee stock compensation. However, SFAS 123 also allows an
entity to continue to measure compensation cost for stock options granted to
employees using the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), which only requires charges to compensation expense for
the excess, if any, of the fair value of the underlying stock at the date a
stock option is granted (or at an appropriate subsequent measurement date) over
the amount the employee must pay to acquire the stock. The Company has elected
to continue to account for employee stock options using the intrinsic value
method under APB 25. By making that election, it is required by SFAS 123 and
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"), to provide pro forma
disclosures of net loss and net loss per common share as if a fair value based
method of accounting had been applied, if such amounts differ materially from
the historical amounts. As a result of amendments to SFAS 123, the Company will
be required to expense the fair value of employee stock options beginning with
its fiscal quarter ending March 31, 2006.
The exercise price of all of the options granted to employees has been equal to
or greater than the fair market value at the date of grant and, accordingly, the
Company has not recorded any earned or unearned compensation cost related to
such options in the accompanying condensed consolidated financial statements.
The Company's historical net loss and net loss per share and pro forma net loss
and net loss per share assuming compensation cost had been determined based on
the fair value of the options at the date of grant and amortized over the
vesting period consistent with the provisions of SFAS 123 are set forth below:
-9-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
Three Months Ended
March 31,
------------------------
2005 2004
--------- -----------
Net loss, as reported $(439,959) $ (941,422)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards -- (336,507)
--------- -----------
Pro forma net loss $(439,959) $(1,277,929)
========= ===========
Basic and diluted loss per common share as reported $ (0.02) $ (0.06)
========= ===========
Basic and diluted loss per common share pro forma $ (0.02) $ (0.08)
========= ===========
In accordance with the provisions of SFAS 123, all other issuances of common
stock, options or other equity instruments to employees and consultants as
consideration for goods or services received by the Company are accounted for
based on the fair value of the equity instruments issued (unless the fair value
of the consideration received can be more reliably measured). The fair value of
any options or similar equity instruments issued will be estimated based on the
Black-Scholes option-pricing model, which meets the criteria set forth in SFAS
123, and the assumption that all of the options or other equity instruments will
ultimately vest.
Net Loss per Share
The Company presents "basic" earnings (loss) per share and, if applicable,
"diluted" earnings per share pursuant to the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Basic
earnings (loss) per share is calculated by dividing net income or loss by the
weighted average number of common shares outstanding during each period. The
calculation of diluted earnings per share is similar to that of basic earnings
per share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potentially
dilutive common shares, such as those issuable upon the exercise of options and
warrants, were issued during the period and the treasury stock method had been
applied. Since the Company had net losses for the three months ended March 31,
2005 and 2004, the effects of the assumed exercise of outstanding options and
warrants would have been anti-dilutive and, accordingly, basic and diluted net
loss per share in each period were the same. As of March 31, 2005 and 2004, the
Company had options and warrants outstanding for the purchase of 19,919,263 and
6,026,188 shares of common stock, respectively, that were not included in the
computation of diluted loss per share.
Concentrations
The Company receives nearly all of its revenue from Cantor. It is anticipated
that the Company's revenue sources will diversify over time, but for the near
term, a high percentage of the Company's revenue will be concentrated with
Cantor.
Intangible Assets
Intangible assets, which consist of intellectual property, are recorded at cost
and will be amortized on a straight-line basis over their estimated useful lives
of 5 years.
-10-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
Reclassifications
Certain reclassifications of previously reported amounts have been made to
conform to the current period presentation.
NOTE 3 - INTANGIBLE ASSETS
Intangible assets consist of the following:
March 31, 2005
-------------------------------------------
Gross Carrying Accumulated Net
Amount Amortization
------------ ------------ ------------
Amortized intangible assets
Intellectual Property $ 313,500 $ -- $ 313,500
------------ ------------ ------------
Total $ 313,500 $ -- $ 313,500
============ ============ ============
On March 13, 2005, the Company acquired $313,500 of intellectual property
from Absolute Game, Ltd. ("Absolute") in exchange for $263,500 in stock and
warrants and $50,000 in cash. The intellectual property consists of next
generation digital casino and poker games and the Company expects to derive
benefit with the next version of Cantor's Internet gaming site.
Since the Company acquired the intellectual property on March 13, 2005, and had
not yet utilized the property, no amortization expense was recorded for the
three months ended March 31, 2005. Estimated amortization expense for the
succeeding calendar years is (i) $47,025 in the remainder of calandar 2005; (ii)
$62,700 in calendar 2006; (iii) $62,700 in calendar 2007; (iv) $62,700 in
calendar 2008; (v) $62,700 in calendar 2009; and (vi) $15,675 in calendar 2010.
NOTE 4 - COMMITMENTS
Consulting Agreements
In March 2005, the Company entered into a consulting agreement with Peter
Bengtsson, the Chief Executive Officer of Absolute. The consulting agreement is
effective for a period of two years and includes Mr. Bengtsson and one
additional game developer/graphics artist. Collectively, Mr. Bengtsson and the
third party will be paid $12,000 per month.
NOTE 5 - ISSUANCES OF COMMON STOCK
On March 14, 2005, the Company issued 250,000 shares of common stock with a fair
value of $127,500, determined by the closing market price, in exchange for the
purchase of intangible assets from Absolute.
Pursuant to a private placement consummated in 2004 (the "Private Placement"),
the Company was obligated to file a registration statement (the "Registration
Statement") no later than July 15, 2004. The Private Placement consisted of
units, each unit priced at $10,000 which was comprised of 10,000 shares of
common stock and a warrant to purchase 10,000 shares of common stock at $1.50
per share, that expires on May 31, 2005.
-11-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
The Company did not file the Registration Statement by July 15, 2004, but rather
filed it on March 3, 2005. Accordingly, the Company issued to the purchasers of
units a total of 563,250 shares of common stock, which represented 3% of the
number of shares of common stock purchased by each purchaser for each month or
part thereof of such late filing. Such shares of common stock were registered
under the Registration Statement on Form S-3 filed with the Securities and
Exchange Commission and declared effective.
NOTE 6 - STOCK OPTIONS AND WARRANTS
Stock Options
A summary of the changes in outstanding stock options during the three months
ended March 31, 2005 follows:
Shares Weighted-Average
Exercise Price
---------------- -----------------
Outstanding, January 1, 2005 2,508,442 $ 0.78
Forfeited (335,302) $ 0.75
----------------
Outstanding, March 31, 2005 2,173,140 $ 0.78
================
Exercisable, March 31, 2005 2,123,140 $ 0.78
================
Stock Warrants
During the three months ended March 31, 2005, the Company issued a warrant to
purchase 500,000 shares of common stock in connection with the purchase of
intellectual property from Absolute. The warrant is exercisable for three years
commencing March 14, 2005, is fully vested and has an exercise price of $0.40
per share. The fair value of the warrant, calculated using a Black-Scholes
option-pricing model, amounted to $136,000.
A summary of the changes in outstanding warrants during the three months ended
March 31, 2005 follows:
Shares Weighted-Average
Exercise Price
----------------- ----------------
Outstanding, January 1, 2005 17,246,123 $ 0.76
Issued in connection with purchase of intellectual property 500,000 $ 0.40
-----------------
Outstanding, March 31, 2005 17,746,123 $ 0.75
=================
-12-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
Fair Value of Warrant
The fair value of the warrant issued during the three months ended March 31,
2005 was calculated using the Black-Scholes option-pricing model in accordance
with SFAS 123 based on the following assumptions: expected life of 2.96 years,
risk free interest rate of 3.97%, dividend yield of 0% and volatility of 66.16%.
NOTE 7 - PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of preferred stock,
having a $10 par value. The Company has designated 1,000,000 shares as Class A
convertible and 1,000,000 shares as Class B convertible. At the time of
issuance, the Board of Directors has the right to designate the rights,
preferences and privileges of each class. As of March 31, 2005, the Company did
not have any shares of preferred stock outstanding.
NOTE 8 - SENIOR SECURED NOTE PAYABLE
Pursuant to the Loan Facility and Investment Agreement (as described in Note 8
of the financial statements in the Annual Report filed on Form 10-KSB) dated
December 8, 2004, between the Company and Cantor, the Company received on March
31, 2005 the installment of $250,000 scheduled to be paid on that date.
NOTE 9 - INFORMATION ABOUT GEOGRAPHICAL AREAS
The Company operates in one reportable segment - Internet gaming software
development. Information about geographical areas is set forth below for the
three months ended March 31, 2005 and 2004:
March 31, 2005
Geographical area Revenues from Long-lived
external assets
customers
--------------- ---------------
United States $ 5,000 $ 121,772
United Kingdom -- $ 2,116
Australia $ 229,780 $ 19,447
--------------- ---------------
$ 234,780 $ 143,335
=============== ===============
March 31, 2004
Geographical area Revenues from Long-lived
external assets
customers
--------------- ---------------
Australia $ 28,673 $ 76,422
--------------- ---------------
$ 28,673 $ 76,422
=============== ===============
-13-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
NOTE 10 - SUBSEQUENT EVENTS
In April 2005, the Company entered into an amended and restated employment
agreement (the "Amended Agreement") with William McMaster. The employment
agreement with Mr. McMaster, who is the Chief Technology Officer of the Company,
continues until December 31, 2007, subject to earlier termination under certain
circumstances. The employment agreement for Mr. McMaster provides for an annual
salary of $120,000, which may be increased by the Board of Directors.
In conjunction with the Amended Agreement, Mr. McMaster was issued an option to
purchase 300,000 shares of common stock (the "Option") pursuant to the Company's
2004 Stock Option and Incentive Plan. The terms of the Option provide for
vesting to occur as follows: one-third, or 100,000, on December 31, 2005;
one-third, or 100,000, on December 31, 2006; and one-third, or 100,000, on
December 31, 2007. In the event Mr. McMaster elects to exercise any vested
portion of the Option prior to December 31, 2007, the proceeds realized
therefrom shall be held in escrow pending completion of the Amended Agreement on
December 31, 2007. The Company will release the applicable amount necessary to
pay all taxes incurred as a result of such exercise.
Further, Mr. McMaster must remain employed by the Company through December 31,
2007, or the Option, along with the options to purchase a total of 200,000
shares previously issued to Mr. McMaster will be cancelled. The only exception
to the foregoing is if Mr. McMaster is terminated without cause as defined in
the Amended Agreement. In such event, Mr. McMaster would be allowed to keep all
vested options.
-14-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Statement on Forward-Looking Information
Certain information included herein contains statements that may be
considered 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,
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.
Overview
On or about January 12, 2004, NorStar Group, Inc., a publicly-held
company that was not conducting or developing any commercial operations, or
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, or G&EG Nevada, a developer of Internet gaming software for
use in regulated gaming markets, as well as central server gaming systems, game
content and gaming devices for land-based gaming; (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., or 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 treated as 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 condensed
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 at 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.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires 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 of intellectual property,
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.
-15-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Description of Revenues
Through March 31, 2005, our revenues were generated from the
development of prospective Internet gaming sites in regulated gaming markets
outside of the United States, as well as maintenance and technical support
contracts. On December 8, 2004, we entered into definitive agreements with
Cantor which included, among other things, the exclusive license of our Internet
gaming software to them. In conjunction with this license, we currently receive
a monthly development fee for the development of the Cantor Casino, which is
anticipated to go live in the third quarter of 2005 and will not permit bets to
be placed by individuals in the United States, and we will receive a portion of
the net win realized by the Cantor Casino following repayment of certain
expenses associated therewith. In addition, it is anticipated that we will
develop additional "white-label" Internet gaming sites, each of which will
prohibit bets in the United States, for clients of Cantor as well third parties
introduced by us. Similar to the Cantor Casino, we will receive a development
fee and a portion of the net win realized by such "white-label" sites.
In addition, we are focused on the provision of our central server
gaming system and suite of games in the land-based gaming markets of Europe and
the United States. Our business model for our land-based initiatives is
primarily based upon recurring revenue to be derived from the placement of our
products. Specifically, we anticipate offering our central server gaming system
in the foregoing markets on a license basis, whereby we will receive a recurring
license fee based upon gaming machines utilizing our software. Gaming machines
will primarily be placed on a revenue sharing or participation basis with the
Company anticipating realizing 15%-30% of the net win (i.e., coin inserted into
a machine less the coin paid out) from the gaming machines, depending upon the
market. Although not our specific focus, from time to time we anticipate selling
our gaming machines. Alternatively, we anticipate occasionally deploying gaming
machines on the basis of part cash payment and a lower revenue sharing
percentage. We also anticipate generating 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 turnkey third party manufacturing
sources with which we have an alliance and utilize existing distribution
channels.
The placement of gaming equipment on a revenue sharing basis is
capital intensive. In this regard, we will require a credit facility sufficient
to finance the manufacture and deployment of our 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. At this time, we do not have a
credit facility.
When we install our gaming machines on a revenue-sharing basis,
there will generally be no cost to our casino clients, as we would share in the
recurring revenues generated from the gaming machines. We would, however, retain
ownership of the gaming machines and the central server gaming system, as
applicable, throughout the term of the revenue-sharing and licensing agreements,
respectively, and would 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 could maximize the amount of placements of our
products; provided, 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, not having previously deployed products
or provided services to gaming operators in the land-based gaming markets in
which we anticipate entering, and the highly competitive nature of games on
casino floors.
-16-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
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 consisting of upfront licensing and periodic
payments as opposed to steady recurring revenues. Moreover, our revenues have
been limited over the last two years as we have been intensely focused on the
finalization of our central server gaming system for the Europe and North
America gaming markets, as well as development of electronic bingo, keno,
instant lottery, video poker and roulette products for deployment in such
markets.
We anticipate that our future revenues will be derived from our
Cantor Internet gaming license as well as the placement of our central server
gaming system and gaming machines on a revenue-sharing and sale basis and, to a
lesser extent, from maintenance and technical support agreements. At this time,
it is difficult to predict the breakdown of anticipated future revenues from
each of the foregoing initiatives.
Revenue Recognition
Revenues from the enhancement, maintenance and technical support of
Internet gaming sites in regulated gaming markets are recognized as the services
are performed, or if no pattern of performance is discernable, on a
straight-line basis over the period in which the services are performed.
Revenues from fixed price Internet gaming site development contracts
in regulated gaming markets, in relation to software development specifically
performed for each respective client, will be recognized using the percentage
of completion method of accounting with labor hours as the basis for measurement
of progress toward completion of the contracts. Revenues from time and material
contracts are recognized at the contractual rates as labor hours are delivered
and direct expenses are incurred.
When we receive a percentage of the gaming revenues generated by our
client's Internet gaming sites, we will generally recognize such revenues based
upon a percentage of the gross win when earned.
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
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.
-17-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Revenues
During the three months ended March 31, 2005, we generated revenues
from the development of the Cantor Internet gaming site, technical support
services and product sales totaling $234,780, as compared to revenues from
services of $28,673, during the three months ended March 31, 2004. The $206,107,
or 718.8% increase in revenues, which consists of a $201,107 increase in
services revenue and a $5,000 increase in revenues from a product sale in the
three months ended March 31, 2005, was due primarily to the increased
development activity associated with the Cantor Internet gaming site. We
continue 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 a slight increase in revenue during the second quarter of 2005 from
Internet gaming contracts from existing and new contracts and as we complete the
development of our land-based gaming products. We anticipate deploying gaming
machines in the United Kingdom in the second quarter of 2005.
Cost of Revenues
During the three months ended March 31, 2005, our cost of revenues
was $104,738, compared to $37,808 during the three months ended March 31, 2004.
During the three months ended March 31, 2005, our costs of revenues consisted of
$99,042 attributable to services and $5,696 attributable to the product sale,
whereas, during the three months ended March 31, 2004, our costs of revenues
related only to services. The $66,930 increase in the cost of revenues was
directly attributable to increased revenues in connection with the development
of Cantor's Internet gaming site, as compared to the same period in 2004. We do,
however, anticipate that our revenues, in future periods, will escalate due to
increased Internet gaming activity as well as deployment of our land-based
gaming products and services. Cost of revenues will increase as well but our
operating margins should improve as we commercialize several new products.
In terms of gross margin, we realized a gross margin of $130,042 during
the three months ended March 31, 2005, compared to a deficiency of $9,135 during
the three months ended March 31, 2004. The $139,177 or 1,523.6% increase in
gross margin related primarily to the increase in higher margin service revenue.
Operating Expenses
For the three months ended March 31, 2005, we incurred total
operating expenses of $537,146, compared to $914,264 for the three months ended
March 31, 2004, a decrease of $377,118, or 41.2%. The decrease in total
operating expenses relates to a $56,038 decrease in research and development
expenses and a $321,080 decrease in selling, general and administrative
expenses.
-18-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
During the three months ended March 31, 2005, we incurred research
and development expenses of $158,210, compared to $214,248 during the three
months ended March 31, 2004, a decrease of $56,038, or 26.2%. The decrease in
our research and development expenses was due primarily to a redirection of the
efforts of personnel from research and development to revenue producing services
in the three months ended March 31, 2005 as compared to the same period in 2004.
The trend is not expected to continue as we anticipate further increasing our
research and development efforts in central server technology in the upcoming
quarters. We continue to develop our central server gaming system platform and
related games and other products for deployment in land-based casinos. 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. We
anticipate making our initial deployment of products into land-based gaming
markets in the next several months. While this is new territory for us, we have
previously been through the development and lab certification process on a
number of occasions with respect to our Internet gaming platform. We anticipate
that, as with the Internet gaming platform submissions, we will be successful in
obtaining certification from the gaming labs regarding our various hardware and
software products. To reduce the risk associated with our initial entry into the
land-based gaming market, we will utilize well established third party turnkey
manufacturing sources for our gaming devices and will utilize industry veterans
for the installation and ongoing maintenance of the gaming machines.
During the three months ended March 31, 2005, we incurred selling,
general and administrative expenses of $378,936, compared to $700,016 during the
three months ended March 31, 2004, a decrease of $321,080, or 45.9%. The
decrease in our selling, general and administrative expenses was due primarily
to significant expenditure in 2004 on travel and road shows relating to our
private placement, retention of professionals, including gaming, intellectual
property and other outside counsel, our exhibition at industry shows and
conventions, salaries related to new employees, and non cash compensation
expense of $175,088 relating to options and warrants issued to consultants in
consideration for strategic services. The Company did not incur similar charges
for the three months ended March 31, 2005 and, accordingly, we anticipate that
our selling, general and administrative expenses will be somewhat lower in the
near-term as compared to prior periods, while increasing thereafter over the mid
to long-term as we expand our staff to handle future proposed development
projects.
Other Income (Expense)
For the three months ended March 31, 2005, other expense was
$32,855, compared to other expense of $18,023 for the three months ended March
31, 2004, an increase of other expense of $14,832. The increase is related
primarily to $30,515 of interest expense, incurred in connection with the
issuance of the senior secured note payable and $55,517 amortization of
associated debt discount offset by other income of $53,177 which represented the
settlement of an outstanding tax liability.
Net Loss
For the three months ended March 31, 2005, we experienced a net loss
of $439,959, compared to a net loss of $941,422 for the three months ended March
31, 2004, a decreased loss of $501,463, or 53.3% mainly the result of the items
described above.
LIQUIDITY AND CAPITAL RESOURCES
Overview
As of March 31, 2005, we had cash of $367,506, accounts receivable of
$106,200 and total liabilities of $1,175,713, of which $422,005 are current
liabilities. Accordingly, as of March 31, 2005, we had working capital of
$51,701 and a stockholders' deficiency of $234,860. During the three months
ended March 31, 2005, cash on hand decreased by $226,518, from $594,024 to
$367,506. The decrease in cash reflected $250,000 of net cash provided by
financing activities, offset by $418,432 of net cash used in operating
activities, $54,413 of net cash used in investing activities and the $3,673
effect of exchange rate changes on cash.
-19-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Operating activities used net cash of $418,432 during the three
months ended March 31, 2005, whereas operating activities used net cash of
$918,151 during the three months ended March 31, 2004. The net cash used in
operating activities during the three months ended March 31, 2005 related
primarily to our net loss of $439,959, a decrease in accounts receivable of
$74,948, an increase in accounts payable of $11,982, an increase in accrued
expenses of $34,874, a decrease in accrued compensation - officers of $5,005,
and a decrease in foreign taxes payable of $166,009, offset, in part, by
non-cash costs of amortization of debt discount of $55,517 and depreciation
expense of $23,319. During the three months ended March 31, 2004, our operating
activities used net cash of $918,151, reflecting our net loss of $941,422,
offset, in part, by the issuance of options and warrants with a fair value of
$175,088, a decrease in prepaid expenses of $20,290, a decrease in accounts
payable of $13,979, a decrease in accrued expenses of $50,649, and a decrease in
accrued compensation - officers of $71,559.
Investing activities used $54,413 during the three months ended
March 31, 2005, compared to $2,153 used during the three months ended March 31,
2004. The increased use of cash in investing activities reflects primarily the
purchase of intangible assets. We acquired intellectual property consisting of
next generation digital casino and poker games and expect to derive a benefit
when we release the next version of our client's Internet gaming site.
Our financing activities provided net cash of $250,000 during the
three months ended March 31, 2005, compared to $1,112,933 during the three
months ended March 31, 2004. The net cash provided by our financing activities
during the three months ended March 31, 2005 reflects $250,000 from the issuance
of a senior secured note under an existing debt agreement. The net cash provided
by our financing activities during the three months ended March 31, 2004
reflects $1,570,000 in net proceeds from the sale of 1,772,000 shares of common
stock in a private placement, offset by $457,067 used to repay related party
loans.
Outlook
We incurred losses of $439,959 and $941,422 and negative net cash
flows from operating activities of $418,432 and $918,151 for the three months
ended March 31, 2005 and 2004, respectively. As of March 31, 2005, we had an
accumulated deficit of $7,132,799. These conditions raise substantial doubt
about our ability to continue as a going concern.
We anticipate that for the twelve month period ending March 31,
2006, we will need a minimum of $2,500,000 for ongoing research and development
of our land-based gaming systems and game content, finalization of the Cantor
Casino, commencement of the development of the next generation Internet gaming
system, 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 Europe and North America.
Until we generate sufficient cash from our operations, we will need
to rely upon private and institutional sources of debt and equity financing.
Based on presently known plans, we believe that we will be able to fund our
operations and required expenditures through the third quarter of 2005 through
cash on hand and cash proceeds from the anticipated loan fundings by Cantor. We
will require additional cash, either through additional loans or the exercise of
warrants by Cantor, or from third party sources. Alternatively, we will be
forced to seek cash from other lending sources, sell certain assets or change
operating plans to accommodate such liquidity issues. No assurances can be given
that we will successfully obtain liquidity sources necessary to fund our
operations to profitability and beyond.
-20-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
RISK FACTORS
We are subject to a high degree of risk as we are considered to be
in unsound financial condition. The following risks, if any one or more occurs,
could materially harm our business, financial condition or future results of
operations, and the trading price of our common stock could decline. These risks
factors include, but are not limited to, our limited operating history, history
of operating losses, the inability to obtain for additional capital, the failure
to successfully expand our operations, the barriers of entry into new gaming
markets, the competition in the gaming industry from competitors with
substantially greater resources, the legal and regulatory requirements and
uncertainties related to our industry, the inability to enter into strategic
partnerships with manufacturers and distributors, the loss of key personnel,
adverse economic conditions, adverse currency rate fluctuations, the inability
to protect our proprietary information against unauthorized use by third
parties, the unenforceability of agreements with Native American tribes, the
control of our common stock by our management, the classification of our common
stock as "penny stock," the absence of any right to dividends, the costs
associated with the issuance of and the rights granted to additional securities,
the unpredictability of the trading of our common stock and the ability of our
Board of Directors to issue up to collectively 10,000,000 shares, $10 par value,
of preferred stock.
For a more detailed discussion as to the risks related to Gaming &
Entertainment Group, Inc., our industry and our common stock, please see the
section entitled, "Management's Discussion and Analysis or Plan of Operation -
Risk Factors," in our Annual Report on Form 10-KSB, as filed with the Securities
and Exchange Commission on March 3, 2005.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
We evaluated the effectiveness of our disclosure controls and
procedures as of March 31, 2005, the end of the period covered by this Quarterly
Report on Form 10-QSB. This evaluation was done with the participation of our
chief executive officer and our president, and with the participation of our
former chief executive officer. Upon the consummation of a share exchange on
January 12, 2004 involving Gaming & Entertainment Group, Inc., a Nevada
corporation, Jay Sanet, our former chief executive officer resigned, and Tibor
N. Vertes and Gregory L. Hrncir were appointed as our chief executive officer
and president, respectively. Mr. Vertes serves as our principal executive
officer and Mr. Hrncir serves as our principal financial and accounting officer.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
Limitations on the Effectiveness of Controls
Our management does not expect that our disclosure controls and
procedures or our internal controls over financial reporting will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, but not absolute, assurance that the
objectives of a control system are met. Further, any control system reflects
limitations on resources, and the benefits of a control system must be
considered relative to its 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, 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 a
control. The design of a control system is also based upon certain assumptions
about the likelihood of future events, there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Although unlikely, due to the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
may not be detected.
ITEM 4. CONTROLS AND PROCEDURES
Management is aware that there is a lack of segregation of duties at the
Company due to the small number of employees dealing with general administrative
and financial matters. However, at this time management has decided that
considering the employees involved and the control procedures in place, the
risks associated with such lack of segregation duties do not justify the
expenses associated with such increases. Mangement will periodically reevaluate
this situation.
-21-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Conclusions
Based on this evaluation, our chief executive officer and our
president concluded that, subject to the limitations noted above and as of the
evaluation date, our disclosure controls and procedures are effective to ensure
that the information we are required to disclose in reports that we file or
submit under the Exchange Act is recorded, processed, summarized, and reported
in such reports within the time periods specified in the Securities and Exchange
Commission's rules and forms.
Changes in Internal Controls
There were no changes in our internal controls over financial
reporting that occurred during the last fiscal quarter, i.e., the three months
ended March 31, 2005, that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2005, the Company issued
250,000 shares of common stock relating to purchase of assets from Absolute
Game, Ltd. consisting of next generation, digital casino and poker games. In
addition, the Company issued a warrant to purchase 500,000 shares of common
stock, exercisable for a period of three (3) years at an exercise price of $0.40
per share. In issuing the foregoing securities we relied upon the exemptions
from securities registration provide by Rule 4(2) and Regulation S of the
Securities Act of 1933, as amended.
In conjunction with the Company's 2004 private placement, the Company was
obligated to file a registration statement no later than July 15, 2004 to
register the securities sold therein. The Company did not file the registration
statement by July 15, 2004, but rather filed it on March 3, 2005. As a result,
the Company issued the investors in the private placement a total of 563,250
shares of common stock, which represented 3% of the number of shares of common
stock purchased by each purchaser for each month or part thereof of the late
filing. The newly issued shares of common stock are in the process of being
registered for resale under the Company's registration statement on Form S-3
previously filed with the Securities and Exchange Commission. We relied upon the
exemption from securities registration provided by Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
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GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS
(a) Exhibits.
10.14 Amended and Restated Employment Agreement of William McMaster
dated April 7, 2005.
31.1 Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350).
-24-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GAMING & ENTERTAINMENT GROUP, INC.
(Registrant)
Date: May 16, 2005 By: /s/ Gregory L. Hrncir
-----------------------------------
Gregory L. Hrncir
Its: President and Secretary
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