UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2005
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|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
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Commission file number 000-28399
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Gaming & Entertainment Group, Inc.
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(Name of small business issuer in its charter)
Utah 59-1643698
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
16821 Escalon Dr., Encino, CA 91436
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (818) 400-5930
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of each class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year: $1,274,819
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days: $6,940,710 ($0.35 per
share as of March 20, 2006).
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common Stock, $.01 par value,
19,830,602 shares (as of March 20, 2006).
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PART I........................................................................ 1
ITEM 1. DESCRIPTION OF BUSINESS............................................1
ITEM 2. DESCRIPTION OF PROPERTY............................................5
ITEM 3. LEGAL PROCEEDINGS..................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................6
PART II........................................................................6
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS..............6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........8
ITEM 7. FINANCIAL STATEMENTS..............................................24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..........................................59
ITEM 8A. CONTROLS AND PROCEDURES...........................................59
PART III......................................................................60
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.................60
ITEM 10. EXECUTIVE COMPENSATION............................................62
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS...................................63
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................66
ITEM 13. EXHIBITS..........................................................69
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................69
SIGNATURES.................................................................71
EXHIBIT INDEX.................................................................72
On March 15, 2006, the Board of Directors of the Company concluded that
based upon recent interpretations of the Securities and Exchange Commission (the
"Commission") that certain of the Company's common stock subject to registration
rights needed to be reclassified from shareholders' equity into temporary
equity, and that a liability should be accrued for the fair value of penalty
common stock related to these registration rights.
Accordingly, the Company has restated its financial statements for the
interim periods ended March 31, 2005, June 30, 2005, September 30, 2005 and
2004, and the year ended December 31, 2004. Specifically, the Company
reclassified amounts from shareholders' equity to temporary equity and recorded
charges penalty common stock and the fair value of related warrants. This report
contains restated financial information for all such periods. The financial
impact of the adjustments is described in Note 3 of the Notes to Consolidated
Financial Statements set forth herein and in Item 6 "Management Discussion and
Analysis or Plan of Operation". Previously issued financial statements for such
periods should not be relied upon.
None of the adjustments resulting from the restatements had any impact on
cash balances for any period. However, the Company's consolidated balance sheets
and statement of operations were restated to reflect the restated net loss and
revisions to certain balance sheet accounts.
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
On 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 GEG
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 GEG Nevada; and (iv) a change in the name of
NorStar to Gaming & Entertainment Group, Inc., or the Company. As a result of
the exchange, GEG Nevada became a subsidiary of the Company, and the former
stockholders of GEG 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 GEG Nevada became the controlling members of the board
of directors and management of the combined companies. Since GEG Nevada was the
only operating company in the exchange and the former stockholders of GEG 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 GEG Nevada was the accounting
acquirer (and the legal acquiree) and NorStar was the accounting acquiree (and
the legal acquirer). Since the exchange was accounted for as a "reverse
acquisition," the consolidated financial statements included in the Company's
Annual Reports on Form 10-KSB for the fiscal years ended December 31, 2005 and
2004, reflect the historical financial statements of GEG Nevada, the accounting
acquirer, as adjusted for the effects of the exchange of shares on its equity
accounts, the inclusion of the net liabilities of the accounting acquiree as of
January 12, 2004 on their historical basis and the inclusion of the accounting
acquiree's results of operations from that date.
In this report, the references to "we," "us" or "our" relate to GEG Nevada
prior to January 12, 2004 and to GEG, GEG Nevada and our other subsidiaries from
that date forward. On May 5, 2005, we dissolved GEG Nevada. As of the date of
filing of this Annual Report on Form 10-KSB, we have two wholly-owned operating
subsidiaries, Gaming & Entertainment Technology Pty Ltd., a company formed under
the laws of Australia, and Gaming & Entertainment Group, Ltd., a company formed
under the laws of the United Kingdom.
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SUMMARY OF BUSINESS
Since 1995, we have been a leading supplier of government-regulated
networked gaming technology. During this period, we have built a comprehensive
networked gaming platform that has passed multiple government prescribed
validations in Australia (Tasmania and Queensland), Republic of Vanuatu and
Great Britain (Alderney and the Isle of Man). Our historical focus has been on
the design and deployment of our gaming platform in the Internet-based gaming
market, as evidenced by our agreements with traditional land-based gaming
operators and numerous Australia-based online operators. In 2000, our gaming
platform went live with its first customer, www.wrestpointcasino.com in
Tasmania, Australia and for points-play at GOCORP in Queensland, Australia. In
2002, we commenced live operations of www.clubfiore.com, an online gaming site
offered by Action Online, Inc. through the Isle of Man.
Thereafter, we commenced the expansion of our product line to include
gaming systems and game content, ultimately for deployment in land-based gaming
establishments. Specifically, we developed, a proprietary gaming platform,
amusement with prizes, or AWP, and Section 16 games for deployment in the United
Kingdom and other European gaming markets that offer these types of games.
On August 31, 2004, we entered into a series of agreements with GEG
Holdings, LLC, or GEG Holdings, an affiliate of Cantor Fitzgerald, L.P., for
$750,000 of debt financing. Thereafter, on December 8, 2004, we entered into a
series of definitive agreements with Cantor G&W (Nevada), L.P., or Cantor, to
create a formal strategic partnership which provided Cantor with, among other
things, an exclusive perpetual worldwide license to our Internet gaming
software, and an additional $1,250,000 of debt financing to us. As part of the
transaction with Cantor, we developed all of the infrastructure and games
associated with the Cantor Casino. The Cantor Casino went live in October 2005.
Following this date, we continued to develop additional games and other products
on behalf of Cantor. On February 15, 2006, we sold certain assets to Cantor,
including all rights to our Internet gaming platform and games. We remain
entitled to recurring royalties from income produced by the Cantor Casino and
all other white-label Internet gaming sites developed by them in the future. All
such royalty payments will be applied against the outstanding senior secured
note issued in favor of Cantor.
Following the sale of our Internet gaming assets to Cantor, our current
business strategy consists of the following:
o Commercialization of our AWP and Section 16 games in the United
Kingdom initially, and thereafter in other European Union countries
where these types of games are prominent
o Acquisition of a United States-based provider of gaming machines to
the Native American gaming marketplace
o Partnering with a major gaming equipment manufacturer for land-based
gaming applications of our central server gaming platform
TARGET MARKET STRATEGIC INITIATIVES
Deployment of Products in Land-Based Gaming Establishments
Commencing in the late second quarter of 2006, we intend to market our
Amusement With Prize (AWP) and "Section 16" (a reference to section 16 of the
Lotteries and Amusements Act 1976) games in the United Kingdom through our
strategic partnership Electrocoin Sales Ltd., an entity that has distributed
and, through a related company, manufactured gaming machines throughout Europe
for more than 25 years. Electrocoin will manufacture and distribute all of our
AWP and Section 16 games on an exclusive basis. By doing so, we avoid the
capital intensive costs of establishing a manufacturing facility as well as
development of a sales and marketing team. Following our initial launch in the
U.K., Electrocoin intends to offer the AWP and Section 16 games in other
European gaming markets.
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Over the past two years, we have developed a variety of AWP and Section 16
games in conjunction with Electrocoin. Our gaming machines have been tested in
gaming establishments for more than nine months, and have demonstrated solid
results. We have benefited greatly from the market knowledge of Electrocoin by
working with them, gaming establishment operators and the players who use these
games to offer gaming machines that we believe will have wide market appeal.
Specifically, we have developed a suite of roulette games which we believe are
unique to the industry in that they satisfy the gaming regulations applicable to
both AWP gaming devices as well as Section 16 gaming devices. Our AWP and
Section 16 roulette games offer gaming establishment owners the choice, on one
gaming machine, to offer our roulette games in AWP or Section 16 format. The
benefits of this option are significant in that in the United Kingdom, gaming
machines are presently offered only on a purchase basis. Accordingly, gaming
establishment operators are quite selective when making their acquisitions. We
believe that our significant research and development efforts will provide the
gaming establishment operators with the flexibility they demand in the rapidly
changing United Kingdom gaming marketplace. We have spent considerable time in
speaking with the players of these games to precisely understand what motivates
them to play certain games, including, among other things, the graphics and
other features that make some games much more successful than others.
The AWP market alone consists of more than 1,000,000 machines throughout
Europe. The product offerings of today are much different than a few years ago.
Players demand significantly more in graphics and playability than before. We
anticipate that our extended research and development period will offer players
roulette games that meet their demands and that will have long-term appeal.
In addition to our suite of roulette games, we have developed Section 16
slot games and a suite of AWP poker games. Once again, each of these games has
been developed in close consultation with an experience provider to the
marketplace, Electrocoin.
Our objective is to place a minimum of 500 gaming machines in our initial
launch. Our arrangement with Electrocoin provides that we book all revenues
associated with the sale of the machines and an even split of the profits. Given
our recent reduction in staff following the sale of certain assets to Cantor, we
have significantly reduced our fixed operating expenses. We believe the
placement of 750 gaming machines per year will achieve profitability, and while
we can provide no assurances that this objective will be achieved, we have the
significant benefit of entering into these markets with a well-known and
established partner who has developed an extensive distribution throughout
Europe over the last twenty-five years.
United States - Native American Gaming
We are currently conducting due diligence on a United States-based
provider of gaming machines to the Native American gaming marketplace. We were
approached by this entity earlier this year to explore the possibility of
acquiring them. This entity has been in existence for several years and has
placed products on a sale and revenue sharing basis at more than twenty casinos
and anticipates entering into several new markets with additional products later
this year. The acquisition target is profitable, and had significantly more
revenues in 2005 than the Company. At this time, there can be no assurance that
we will be successful in consummating the acquisition, and the terms of such
acquisition have not been determined. If we are successful in consummating the
acquisition, it is likely that the terms will include a combination of cash and
the issuance of shares of common stock, the latter of which would have a
dilutive effect on our existing common stockholders. We intend to jointly decide
whether to proceed in the coming months.
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Server-Based Gaming - Downloadable Games
Twenty-five years ago, a majority of all gaming revenue in the United
States was derived from traditional table games such as blackjack, craps and
baccarat. Today, a majority of all gaming revenue in the United States is
generated from gaming machines. The shift from traditional table games to gaming
machines has occurred in the gaming markets outside the United States as well.
Further, the proportion of total revenue originating from gaming machines is
expected to continue to increase as a result of the higher margins produced by
gaming machines when compared with increasing labor costs associated with the
operation of table games and the ability to establish a fixed return on gaming
devices.
Historically, the dominant architecture of gaming machines within
traditional gaming venues has been stand-alone devices, where these devices are
generally connected to the gaming property's monitoring system and may be
connected to wide area progressive jackpot controllers. With the continued
growth in gaming, especially in networked gaming, and the increased reliance on
technology to deliver a superior gaming experience to patrons, substantial
growth is occurring in networked gaming systems. To this end, the Gaming
Standards Association has standardized the Ethernet and TCP/IP protocols for the
networking of gaming machines. Our technology is compliant with these standards.
We are focused on technology that enables the inter-connectivity of
individual gaming machines intra-casino and inter-casino. Many of the major
gaming equipment manufacturers have already introduced, or are in development
of, server-based downloadable gaming platforms and gaming machines into the
marketplace. While we intend to continue to focus on partnering with a major
gaming equipment provider, there can be no assurance that we will be successful
in achieving this objective. Given the capital costs associated with this
emerging market and the significant competition which exists therein, we do not
intend to provide our server-based gaming platform unless a strategic
partnership is consummated.
COMPETITION
We view our current competition in terms of companies that provide AWP and
Section 16 gaming products to the United Kingdom gaming sector. Nearly all of
these companies have significantly longer operating histories, name recognition,
customer bases and financial, technical and marketing resources.
MANUFACTURING, ASSEMBLY AND DISTRIBUTION
As part of our business strategy, we have elected to outsource the
manufacturing, assembly and distribution of our AWP and Section 16 gaming
machines to Electrocoin.
RESEARCH AND DEVELOPMENT
We have a knowledge base of all aspects of software and hardware game
development and currently employ two professionals on a full-time basis for our
ongoing research and development needs. We may retain additional software
developers and graphics designers on a contract basis in the future. All
development is undertaken at our North Sydney, Australia office.
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INTELLECTUAL PROPERTY
Since our inception, we have focused exclusively on gaming and building
products for reputable organizations in the gaming industry. Unless specifically
agreed otherwise, the games and gaming systems we develop are owned by us, and
in the case of our AWP and Section 16 games, manufactured and distributed by our
partner Electrocoin. We generally protect our intellectual property through the
filing of patent and trademark applications for our key inventions and unique
features in the various gaming markets in which we operate.
GAMING REGULATION
We are subject to various laws and regulations that affect both our
general commercial relationships as well as the products we intend to provide in
Europe. Generally, we, along with our executive officers, directors and major
stockholders, are required to become licensed in each jurisdiction in which we
do business. The licensing process is quite intensive and time consuming, and
while we foresee no problems with obtaining the aforementioned license, there
can be no assurances that we, as well as each of our executive officers,
directors and major stockholders will be found suitable in each jurisdiction in
which we seek a gaming license.
EMPLOYEES
As of March 1, 2006, we have six full-time employees, two of which are
engaged in software development, hardware development, graphical design, and
quality assurance, with the remaining four employees engaged in sales and
marketing, finance/accounting, and management. In terms of the geographic
location of our employees, we have four employees in our North Sydney, Australia
office, one employee in our Encino, California office, and one employee based in
London.
In addition to employees, we retain the services of outside consultants,
from time to time, on a variety of matters.
ITEM 2. DESCRIPTION OF PROPERTY.
In 2004, we relocated our corporate offices to 6757 Spencer Street, Las
Vegas, Nevada 89119. Our leased property consists of 7,200 square feet of office
and warehouse space. Our lease is currently $10,700 per month, inclusive of
common area maintenance charges, and the master lease agreement expires in
November 2009. We subleased all of the above premises, at the existing lease
rate, to a third party on June 16, 2005. The sublease concludes on June 15,
2007, after which we will have twenty-nine months remaining on the master lease
agreement. It is our intention to sublease the above premises upon the
conclusion of the existing sublease agreement through the term of the master
lease agreement.
On June 16, 2005, we leased office and warehouse space at 6754 Spencer
St., Las Vegas, Nevada 89119. This sublease had a term of one year and a monthly
lease rate of $2,200. On February 1, 2006, we terminated the sublease and have
no outstanding obligations thereunder. We have relocated our U.S. offices to
16821 Escalon Dr., Encino, California 91436. We do not pay rent at this location
and fair market value would be immaterial.
We also maintain an office in North Sydney, Australia, where we lease
approximately 2,750 square feet at a monthly rate of $13,000 Australian dollars
(US$9,390 as of March 17, 2006). Commencing April 1, 2006, we will pay a nominal
monthly rental amount for use of approximately 400 square feet in this office.
It is our present intention to relocate our Australia operations to another
location in Sydney in the third quarter of 2006 and we anticipate a monthly
lease rate of approximately US$2,500 per month.
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In the United Kingdom, we operate out of the offices of our manufacturing
and distribution partner, Electrocoin, Ltd., in London. We do not pay rent at
this location and fair market value would be immaterial.
ITEM 3. LEGAL PROCEEDINGS.
We are not currently party to any legal proceedings or aware of any
pending or threatened claims, the adverse outcome of which, individually or in
the aggregate, management believes would have a material adverse effect on our
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART I
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS.
Our authorized capital stock consists of 150,000,000 shares of common
stock, par value $.01 per share, 10,000,000 shares of preferred stock
authorized, par value $10 per share of which 1,000,000 shares have been
designated Class A preferred stock, and 1,000,000 shares have been designated
Class B preferred stock. As of March 20, 2006, there were 19,830,602 shares of
common stock issued and outstanding and no shares of Class A and Class B
preferred stock issued and outstanding.
HIGH AND LOW BID PRICES OF OUR COMMON STOCK
As of March 20, 2006, our common stock was held by approximately 400
stockholders of record. Our common stock is quoted and traded on the Over The
Counter Bulletin Board under the trading symbol "GMEI". The following table sets
forth the high and low closing sale prices of our common stock during the
periods indicated:
CALENDAR QUARTER ENDED LOW HIGH
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March 31, 2003 $ 0.50 $ 1.74
June 30, 2003 $ 0.25 $ 1.49
September 30, 2003 $ 0.50 $ 1.99
December 31, 2003 $ 0.25 $ 0.99
March 31, 2004 $ 0.75 $ 1.75
June 30, 2004 $ 0.67 $ 1.30
September 30, 2004 $ 0.42 $ 0.90
December 31, 2004 $ 0.28 $ 0.60
March 31, 2005 $ 0.35 $ 0.51
June 30, 2005 $ 0.21 $ 0.45
September 30, 2005 $ 0.13 $ 0.23
December 31, 2005 $ 0.13 $ 0.23
March 31, 2006 (through March 20, 2006) $ 0.13 $ 0.40
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The last reported sale price of our common stock on the Over The Counter
Bulletin Board on March 20, 2006 was $0.35 per share. We are not aware of any
public market for our options or warrants. The 2003 high and low bid prices
reflect the legal acquirer in the January 2004 reorganization, or NorStar Group,
Inc., and not the accounting acquirer, or the Company, adjusted for the 1-for
24.852732 reverse split.
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EQUITY COMPENSATION PLAN INFORMATION
2004 STOCK OPTION AND INCENTIVE PLAN
The 2004 Stock Option and Incentive Plan, or the Plan, was adopted by our
board on April 1, 2004 and approved by our stockholders on June 14, 2004. The
Plan provides us with the vehicle to grant to employees, officers, directors and
consultants stock options and bonuses in the form of stock and options. Under
the Plan, we can grant awards for the purchase of up to 3,500,000 shares of
common stock in the aggregate, including "incentive stock options" within the
meaning of Section 422 of the United States Internal Revenue Code of 1986 and
non-qualified stock options. As of March 20, 2006, we have options outstanding
to purchase 1,923,168 shares of our common stock under the Plan.
Our board of directors currently determines the persons to whom awards
will be granted, the nature of the awards, the number of shares to be covered by
each grant, the terms of the grant and with respect to options, whether the
options granted are intended to be incentive stock options, the duration and
rate of exercise of each option, the option price per share, the manner of
exercise and the time, manner and form of payment upon exercise of an option. In
the future, we intend to form a compensation committee, comprised of a majority
of non-employee directors that will oversee administration of the Plan.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. Our
board presently, and for the foreseeable future, intends to retain all of our
earnings, if any, for the development of our business. The declaration and
payment of cash dividends in the future will be at the discretion of our board
and will depend upon a number of factors, including, among others, our future
earnings, operations, funding requirements, restrictions under our credit
facility, our general financial condition and any other factors that our board
considers important. Investors should not purchase our common stock with the
expectation of receiving cash dividends.
RECENT SALES OF UNREGISTERED SECURITIES
During the three years ended December 31, 2005, we made the following
issuances of our common stock which were not registered under the Act:
On October 10, 2003, we closed a private placement of units, or the 2003
Offering, consisting of up to 2,000,000 shares of common stock and warrants to
purchase 2,000,000 shares of common stock. In connection with the 2003 Offering,
we sold 748,332 shares of common stock, and issued warrants to purchase an equal
number of shares of common stock. We received gross proceeds totaling $598,750
and incurred transaction costs of $145,211 for net proceeds of $453,539. We also
issued 371,833 shares to underwriters, selected dealers and finders in the 2003
Offering.
The warrants issued in the 2003 Offering are freely transferable and
entitle the owner to purchase shares of common stock at an exercise price of
$1.50 through the close of business on October 10, 2005. A total of forty-nine
investors purchased units in the 2003 Offering. We had reasonable grounds to
believe forty-five were accredited investors and that the remaining four
investors were sophisticated non-accredited investors as a result of (i) their
business or financial experience, (ii) the business or financial experience of
their professional advisors who were unaffiliated with and not compensated by
the Company, any affiliate, or any underwriter or selected dealer of the Company
either directly or indirectly, and/or (iii) their pre-existing business
relationship with the Company or its officers, directors or controlling persons.
In addition, each of the investors (a) had access to business and financial
information concerning us, (b) represented that they were acquiring the
securities for investment purposes only and not with a view towards distribution
or resale except in compliance with applicable securities laws and (c) had such
knowledge and experience in business and financial matters that they were able
to evaluate the risks and merits of an investment in our common stock. The
certificates evidencing the securities issued in the 2003 Offering contain a
legend restricting their transferability absent registration under the Act or
the availability of an applicable exemption therefrom. The issuance of these
securities was made in reliance upon the exemptions from the registration
requirements of the Act pursuant to Section 4(2) of the Act and Rule 506 of
Regulation D promulgated thereunder.
-7-
On May 31, 2004, we closed a private placement of units, or the 2004
Offering, wherein we sold 2,445,000 shares of common stock, and issued warrants
to purchase an identical number of shares of common stock, or the 2004 Warrants.
The 2004 Warrants expired on May 31, 2005.
We received gross proceeds totaling $2,445,000 from the 2004 Offering, and
incurred transaction costs of $301,758 for net proceeds of $2,143,242. The 2004
Offering was sold to 37 investors, each of whom we had reasonable grounds to
believe were accredited investors. Each of the investors (a) had access to
business and financial information concerning us, (b) represented that they were
acquiring the securities for investment purposes only and not with a view
towards distribution or resale except in compliance with applicable securities
laws, and (c) had such knowledge and experience in business and financial
matters that they were able to evaluate the risks and merits of an investment in
our common stock. In addition, the certificates evidencing the shares of common
stock issued in the 2004 Offering contain a legend restricting their
transferability absent registration under the Act or the availability of an
applicable exemption therefrom.
We also issued our underwriter and selected dealers' warrants to purchase
an aggregate of 366,750 shares of common stock, or the Underwriter Warrants, in
consideration for the placement of securities in the 2004 Offering. The
Underwriter Warrants are exercisable at $1.50 per share commencing on May 31,
2005 and concluding on May 31, 2007. In addition, we issued 58,334 shares of
common stock, and a warrant to purchase an equal number of shares of common
stock at $1.50 per share, in exchange for gaming equipment valued at $58,334.
In March 2005, we issued the investors in the 2004 Offering, collectively,
the sum of 563,250 shares of common stock as a result of our failure to file a
registration statement to register the securities sold in the 2004 Offering, and
gain effectiveness thereof, by the prescribed date. The original issuance of
shares of common stock and warrants to purchase shares of common stock in the
2004 Offering as well as the issuance of the aforementioned 563,250 shares of
common stock were made in reliance upon the exemptions from securities
registration provided by Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder.
In addition, in 2004 we issued 507,390 shares of our common stock, having
a fair value of $485,315, to non-related third parties in consideration for
strategic advisory services, investment banking services and software and
hardware documentation. Each of these stock issuances were made in reliance upon
the exemptions from registration provided by Section 4(2) of the Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's Discussion and Analysis for the years ended December 31, 2005
and 2004 presented below reflects certain restatements to the Company's
previously reported results of operations for these periods. See Note 3 of the
Notes to Consolidated Financial Statements for a discussion of these
restatements.
STATEMENT ON FORWARD-LOOKING INFORMATION
-8-
Certain information included herein contains statements that may be
considered forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, or the
Exchange Act, such as statements relating to plans for product development,
product placement, capital spending and financing sources. Such forward-looking
information involves important risks and uncertainties that could significantly
affect anticipated results in the future and, accordingly, such results may
differ from those expressed in any forward-looking statements made herein. These
risks and uncertainties include, but are not limited to, those relating to our
liquidity requirements, our ability to locate necessary sources of capital to
sustain our operations, the continued growth of the gaming industry, the success
of our product development activities, the acceptance of our products in the
marketplace, vigorous competition in the gaming industry, our dependence on
existing management, changes in gaming laws and regulations (including actions
affecting licensing), our leverage and debt service (including sensitivity to
fluctuations in interest rates) and domestic or global economic conditions.
OVERVIEW
On 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 GEG
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 GEG Nevada; and (iv) a change in the name of
NorStar to Gaming & Entertainment Group, Inc., or the Company. As a result of
the exchange, GEG Nevada became a subsidiary of the Company, and the former
stockholders of GEG 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 GEG Nevada became the controlling members of the board
of directors and management of the combined companies. Since GEG Nevada was the
only operating company in the exchange and the former stockholders of GEG 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 GEG Nevada was the accounting
acquirer (and the legal acquiree) and NorStar was the accounting acquiree (and
the legal acquirer). Since the exchange was accounted for as a "reverse
acquisition," the consolidated financial statements included in the Company's
Annual Reports on Form 10-KSB for the fiscal years ended December 31, 2005 and
2004, reflect the historical financial statements of GEG Nevada, the accounting
acquirer, as adjusted for the effects of the exchange of shares on its equity
accounts, the inclusion of the net liabilities of the accounting acquiree as of
January 12, 2004 on their historical basis and the inclusion of the accounting
acquiree's results of operations from that date.
In this report, the references to "we," "us" or "our" relate to GEG Nevada
prior to January 12, 2004 and to GEG, GEG Nevada and our other subsidiaries from
that date forward. On May 5, 2005, we dissolved GEG Nevada. As of the date of
filing of this Annual Report on Form 10-KSB, we have two wholly-owned
subsidiaries, Gaming & Entertainment Technology Pty Ltd., a company formed under
the laws of Australia, and GET UK, Ltd., a company formed under the laws of the
United Kingdom.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 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, 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.
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Description of Revenues
Through December 31, 2005, we have received our revenues 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 G&W (Nevada), L.P., or Cantor, which included, among other things, the
exclusive license of our Internet gaming software to them. In conjunction with
this license, we received a monthly development fee for the development of the
Cantor Casino, which went live in October 2005 and does not permit bets in the
United States. We are entitled to receive royalty payments from Cantor based
upon a portion of the net win realized by the Cantor Casino following repayment
of certain expenses associated therewith. Pursuant to the series of agreements
with Cantor dated February 15, 2006, which includes an amendment to the senior
secured note issued in favor of Cantor, the royalty payments will be applied on
an annual basis against the outstanding principal and accrued interest under the
senior secured note.
At this time we are principally focused on the provision of our
proprietary gaming platform and suite of amusement with prizes, or AWP, and
Section 16 games in the United Kingdom and other countries in the European Union
where applicable. Our AWP suite consists of multiple versions of roulette and
poker games, while our Section 16 games include slots and roulette.
Following an extended period of testing, successful field trials and
multiple changes in the gaming laws of the United Kingdom, we anticipate
commencing sales of AWP and Section 16 gaming machines in the late second
quarter of 2006. To this end, we have established a strategic relationship with
Electrocoin Sales, Ltd., located in London, for all manufacturing, distribution
and maintenance of such gaming machines. Electrocoin has substantive
manufacturing facilities in Cardiff, United Kingdom, and has been a manufacturer
and distributor of gaming machines to the European market for more than
twenty-five years. To this end, Electrocoin has established a significant
network of sales representatives, sub-distributors and gaming operators during
this period in becoming a well respected gaming machine provider.
Our arrangement with Electrocoin provides that we will realize all
revenues related to the sale of our gaming machines and an equal split of the
profits relating thereto.
The principal market for our AWP and Section 16 games will be local gaming
arcades and possibly, to some extent, licensed betting offices in the
jurisdictions Presently, there are more than one million AWP machines in
existence. Many of these machines are using relatively old technology and staid
graphics. We, in coordination with management for Electrocoin, have developed
roulette gaming machines that are unique in that they satisfy the AWP and
Section 16 gaming laws and regulations of the United Kingdom. As a result,
gaming arcade and other operators who purchase our roulette gaming machines will
be able to use our gaming machine either in AWP or Section 16 format, without
having to purchase new gaming machines. We view this as a significant advantage.
The placement of gaming equipment is ordinarily a capital intensive
exercise involving manufacturing, distribution and maintenance of gaming
machines in the field. We have made the strategic choice to outsource all of the
above in an effort to limit capital expense. With our partner Electrocoin, we
have been able to not only achieve our objective of limiting capital expense,
but maintain the ability to realize all revenues upon the sale of AWP and
Section 16 games while equally sharing in the profits from such machines sales.
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While we presently have no intention in doing so, if we elect to install
our gaming machines on a revenue-sharing basis in the future, there will
generally be no cost to the gaming operators, as we would share in the recurring
revenues generated from the gaming machines. We would, however, retain ownership
of the gaming machines and all software relating thereto throughout the term of
the revenue-sharing agreement, 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. The placement of gaming machines
on a revenue sharing basis is a capital intensive exercise and would require us
to procure debt financing or a strategic partner to underwrite the costs
associated with such placements.
In addition to our anticipated placement of AWP and Section 16 gaming
machines in the United Kingdom and other European Union countries where
applicable, we are currently performing due diligence on a United States-based
provider of gaming machines to the Native American gaming marketplace for the
purpose of acquiring this company. Our due diligence investigation is in the
early stage, and there can be no assurance that we will be successful in
consummating a transaction with this company. The specific terms of the proposed
acquisition are currently being discussed and will likely include a combination
of cash and common stock. We anticipate completing our due diligence of this
entity in the second quarter of this year, and a closing would occur, if a
definitive agreement is reached, in the second half of 2006. The transaction, if
consummated, would have a dilutive effect on our existing common stockholders
while providing us with revenues significantly greater than we have realized
from a historical perspective.
We are also actively searching for a strategic partner to implement our
central server gaming system for downloadable gaming applications in slot
machines at casinos. In this regard, we have met with several large gaming
equipment manufacturers about our central server system and the potential sale
or license of the system to them for implementation in casinos. At this time,
there can be no assurance that we will be successful in entering into a
definitive agreement with a third party to achieve the foregoing. Further, given
the costs associated with commercializing our central server gaming system, our
current cash position and the significant competition that exists for
downloadable games and central server systems, we believe that procurement of a
major gaming equipment partner is a prerequisite to commercialization.
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 primarily focused on the
development of products for Cantor, and the development of our gaming platform
and accompanying AWP and Section 16 games for deployment in the United Kingdom
and other European Union countries where applicable.
We anticipate that our future revenues will be derived from the sale of
AWP and Section 16 games in the above mentioned jurisdictions. In addition, if
we are successful in consummating the acquisition of the United States-based
provider of gaming machines to the Native American gaming marketplace, we will
realize revenues generated therefrom. At this time, it is extremely difficult to
predict with accuracy, the breakdown, and amount, of anticipated future revenues
from each of the foregoing initiatives.
Revenue Recognition
Revenue from the development of Internet gaming sites in regulated gaming
markets will generally be reported on the percentage of completion method of
accounting using measurements of progress toward completion appropriate for the
work performed. The development of Internet gaming sites concluded on February
15, 2006 as a result of the sale of our Internet gaming system and games to
Cantor on such date. Thus, after February 15, 2006, we will not realize revenues
from the development of Internet gaming sites.
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Revenues from the enhancement, maintenance and technical support of
Internet gaming sites in regulated gaming markets are recognized as the services
are performed or pro rata over the service period. When we receive a percentage
of the gaming revenues generated by our client's Internet gaming sites, we will
generally recognize such revenues upon receipt. Based upon the sale of our
Internet gaming system and games to Cantor on February 15, 2006, we will not
realize revenues from the enhancement, maintenance and technical support of
Internet gaming sites following such date. We will, however, continue to receive
royalty payments, to be applied against the outstanding principal and accrued
interest under the senior secured note issued in favor of Cantor, with respect
to the Cantor Casino and all "white-label" Internet gaming sites developed by
Cantor utilizing the Internet gaming software sold by us to Cantor.
Revenues from the sale of gaming machines in the United Kingdom and other
European Union countries, as applicable, will be recognized upon completion of
installation and acceptance by the gaming operators, provided collectibility is
reasonably assured.
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, if applicable, will be accounted for similar to an operating lease, with
the revenues recognized as earned over the term of the agreement. 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. At this time, we do not anticipate the placement of our existing gaming
machines on a revenue sharing basis. Further, unless we secure a major gaming
equipment manufacturer as a partner, it is highly unlikely that we will
commercialize our central server gaming system for downloadable gaming
applications at casinos.
Impairment of Long Lived Assets
Impairment losses on long-lived assets, such as equipment, are recognized
when events or changes in circumstances indicate that the undiscounted cash
flows estimated to be generated by such assets are less than their carrying
value and, accordingly, all or a portion of such carrying value may not be
recoverable. Impairment losses are then measured by comparing the fair value of
assets to their carrying amounts.
Valuation of Deferred Taxes
Deferred tax assets and liabilities are recorded based on the temporary
differences between the financial statement and the tax bases of assets and
liabilities and for net operating loss carryforwards measured using the enacted
tax rates in effect for the year in which the differences are expected to
reverse. We periodically evaluate the realizability of our net deferred tax
assets and record a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
Stock-Based Compensation
In accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", we have used the intrinsic
value method and recognize compensation costs as a result of the issuance of
stock options to employees based on the excess, if any, of the fair value of the
underlying stock at the date of grant or award (or at an appropriate subsequent
measurement date) over the amount the employee must pay to acquire the stock.
Therefore, we have not been required to recognize compensation expense as a
result of any grants of stock options to employees at an exercise price that is
equivalent to or greater than fair value. We have also made pro forma
disclosures, as required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), of net income or loss as
if a fair value based method of accounting for stock options granted to
employees had been applied instead when such amounts differ materially from the
historical amounts.
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In accordance with SFAS 123, we will also recognize the cost of shares,
options, warrants and other equity instruments issued to nonemployees as
consideration for services as expense over the periods in which the related
services are rendered by a charge to compensation cost (or another appropriate
expense or prepaid expense account) and a corresponding credit to additional
paid-in capital. Generally, cost will be determined based on the fair value of
the equity instruments at the date of issuance. The fair value of options,
warrants and similar equity instruments 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. The effect of actual forfeitures will be recognized as they
occur.
Equity Issued with Registration Rights
In connection with sales of our common stock and warrants to certain
investors during the year ended December 31, 2004, the Company granted certain
registration rights that provide for liquidated damages in the event of failure
to timely perform under the agreements. Although the common stock purchase
agreement does not provide for net-cash settlement, the existence of liquidated
damages provides for a defacto net-cash settlement option. Therefore, common
stock subject to such liquidated damages does not meet the tests required for
shareholders' equity classification, and accordingly has been reflected between
liabilities and equity in the accompanying consolidated balance sheet until such
time as the conditions are eliminated.
Warrant Liability
In connection with the sale of certain equity instruments during the year
ended December 31, 2004, as described above, the Company issued freestanding
warrants. Although the terms of the warrants do not provide for net-cash
settlement, in certain circumstances, physical or net-share settlement is deemed
to not be within the Company's control and, accordingly, the Company is required
to account for these freestanding warrants as a derivative financial instrument
liability, rather than as stockholders' equity.
The warrant liability is initially measured and recorded at its fair
value, and is then re-valued at each reporting date, with changes in the fair
value reported as non-cash charges or credits to earnings. For warrant-based
derivative financial instruments, the Black-Scholes option pricing model is used
to value the warrant liability.
The classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is re-assessed at
the end of each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether or
not net-cash settlement of the derivative instrument could be required within 12
months of the balance sheet date.
The Company does not use derivative instruments to hedge exposures to cash
flow, market, or foreign currency risks.
Effect of Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
("SFAS 123R"), which is a revision to SFAS 123. SFAS 123R establishes standards
for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. Primarily, SFAS 123R focuses on accounting
for transactions in which an entity obtains employee services in share-based
payment transactions. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments.
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SFAS 123R requires the Company to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award,
which is usually the vesting period. No compensation cost is recognized for
equity instruments for which employees do not render the requisite service.
In accordance with the Securities and Exchanges Commission's Staff
Accounting Bulletin 107, SFAS 123R is effective as of the beginning of the
annual reporting period that begins after December 15, 2005. Under these
guidelines, the Company will adopt SFAS 123R as of January 1, 2006. The Company
expects the adoption of SFAS 123R will have a significant adverse impact on its
future results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS
151"), which is an amendment of ARB No. 43. SFAS 151 requires idle facility
expenses, freight, handling costs, and wasted material (spoilage) costs to be
recognized as current-period charges. It also requires that allocation of fixed
production overhead costs to the cost of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 will be effective for us
beginning January 1, 2006 and resulting adjustments will be made on a
prospective basis. We do not anticipate that the adoption of this standard will
have a significant impact on our business, results of operations or financial
position.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in Opinion 29, however, included certain
exceptions to that principle. SFAS 153 amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
153 is not expected to have a material impact on our financial position and
results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which is a replacement of APB Opinion No. 20,
"Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements". SFAS 154 changes the requirements for the accounting for
and reporting a change in an accounting principle. Previously, most voluntary
changes in accounting principle required recognition of a cumulative effect
adjustment in the results of operations of the period of change. SFAS 154
requires retrospective application to prior periods unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes and corrections of errors
made in years beginning after December 15, 2005; however, it does not change the
transition provisions of any existing accounting pronouncements, such as SFAS
123R. We do not believe the adoption of SFAS 154 will have a material effect on
our business, results of operations, or financial position.
FINANCIAL CONDITION
Our ability to continue as a going concern and achieve profitability, if
at all, will depend upon a number of factors, including, among other things,
market acceptance of our gaming machine products, reliability of our products
and services, customer support and satisfaction, sufficient capital to fund
ongoing research and development and adequate capital to expand our business.
There can be no assurance that any of the foregoing will be accomplished or that
we will achieve profitability on an ongoing basis. As with all developing
companies, we are subject to risks such as uncertainty of revenues, markets,
profitability and the need for additional funding. All of these factors could
have a material adverse effect on our business, financial condition and results
of operations.
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RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2005 AND 2004
Revenues
During the year ended December 31, 2005, we generated revenues from
maintenance and development of Internet gaming sites and technical support
services of $1,274,819, as compared to revenues from technical support services
of $312,401 during the year ended December 31, 2004. The $962,418, or 308.1%,
increase in revenues, consists of a $938,615 increase in services revenue and a
$23,803 increase in product sales revenue. The increase related to the
significant, and consistent, Internet gaming development undertaken on behalf of
Cantor in 2005. We anticipate a slight increase in revenue during the first
quarter of 2006 from the sale of certain assets to Cantor on February 15, 2006.
Thereafter, we anticipate commencing sales of our AWP and Section 16 gaming
machines in the United Kingdom in late second quarter of 2006.
Cost of Revenues
During the year ended December 31, 2005, our cost of revenues was
$528,085, as compared to $305,343 during the year ended December 31, 2004.
During the year ended December 31, 2005, our cost of revenues consisted of
$507,348 attributable to services and $20,737 attributable to product sales. The
$222,742 increase in the cost of revenues was directly attributable to the
significant increase in Internet gaming development revenues, as compared to the
year ended December 31, 2004. We anticipate that our revenues in future periods
may escalate upon the future sales of AWP and Section 16 games in the United
Kingdom initially, and in other European Union countries where such games are
offered thereafter. Our cost of revenues may increase, but our margins are
anticipated to improve with future sales of AWP and Section 16 games through our
manufacturing and distribution partner Electrocoin, Ltd. We will not be engaged
in the manufacture, distribution or maintenance of AWP and Section 16 games, but
rather we will simply provide our software to be loaded on each of the gaming
devices. In addition, our arrangement provides that we will realize all revenues
from the sale of such gaming machines and an equal split in the profit.
During the year ended December 31, 2005, we realized a gross margin of
$746,734, as compared to a gross margin of $7,058 during the year ended December
31, 2004. The $739,676, or 10,480.0% increase in gross margin, related to the
significant increase in Cantor related Internet gaming development revenues
throughout 2005 as compared to only the fourth quarter of 2004.
Operating Expenses
During the year ended December 31, 2005, we incurred total operating
expenses of $1,887,314, as compared to $3,157,693 during the year ended December
31, 2004, a decrease of $1,270,379, or 40.2%. We anticipate that our operating
expenses, particularly as relates to selling, general and administrative
expenses, will decrease in terms of percentage of revenues in 2006 as we focus
on the sale of AWP and Section 16 games through our manufacturing and
distribution partner, Electrocoin.
During the year ended December 31, 2005, we incurred research and
development expenses of $459,029, as compared to $712,467 during the year ended
December 31, 2003, a decrease of $253,438, or 35.6%. The decrease in our
research and development expenses was due primarily to the development of the
Cantor Casino utilizing our existing Internet gaming platform, as compared to
2004 when we utilized more resources towards the development of our central
server gaming system platform and related games and other products for
deployment in land-based casinos. We anticipate making our initial deployment of
AWP and Section 16 games into the United Kingdom market in late second quarter
of this year utilizing our strategic partner, Electrocoin. Thereafter, we
anticipate selling such gaming machines in other European Union jurisdiction
where such games are offered. While this is our initial deployment of gaming
machines into land-based gaming operations, we have minimized the risk by
partnering with Electrocoin, an established manufacturing and distribution
company. Moreover, by doing so, we have eliminated the traditional capital costs
associated with the deployment of gaming machines through avoidance of
manufacturing and the establishment of a sales and distribution team.
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During the year ended December 31, 2005, we incurred selling, general and
administrative expenses of $1,428,285, as compared to $2,445,226 during the year
ended December 31, 2004, a decrease of $1,016,941, or 41.6%. The decrease in our
selling, general and administrative expenses was due primarily to focusing on
the development of the Cantor Casino in 2005 and substantially decreasing many
expenses incurred in the prior fiscal year. In 2004, we incurred significant
expense associated with travel, road shows for our private placement in the
first half of 2004, retention of outside professionals, including gaming,
intellectual property and other counsel, exhibiting at five industry tradeshows
and conventions, salaries related to new employees, and non cash compensation
expense of $660,403 relating to shares, options and warrants issued to
consultants in consideration of strategic services. Included in these non cash
compensation costs were $485,315 of expenses relating to the fair value of
shares of restricted common stock issued to consultants in consideration for
strategic advisory, investment banking, research and hardware and software
documentation services during the year ended December 31, 2004. We anticipate
that our selling, general and administrative expenses will be significantly
lower in 2006 as we reduced the number of employees from fourteen to six in
conjunction with the sale of certain assets to Cantor in February 2006, as well
as our new focus on the sale of AWP and Section 16 games through Electrocoin in
the United Kingdom. Our selling, general and administrative expenses may,
however, increase if we are successful in consummating the acquisition of a
United States-based provider of gaming machines to the Native American gaming
marketplace. While we are currently undertaking a due diligence investigation on
this entity, there is no assurance that we will be successful in consummating
the transaction. If we are successful, the increase in selling, general and
administrative expenses is expected to be offset by increased revenues upon the
consolidation of such entity.
Other Income (Expense)
During the year ended December 31, 2005, other expense was $332,029, as
compared to other expense of $205,727 during the year ended December 31, 2004,
an increase of $126,302, or 61.39%. The increase is related primarily to an
increase of $337,997 of interest expense and amortization of debt discount
associated with the debt financing provided by Cantor, offset, in part, by the
$124,614 increase in other income.
Gain on fair value of warrants for the years ended December 31, 2005 and
2004 was approximately $2,717 and $23,305. The gain is due primarily to the
decrease in the market value of our common stock. The gain represents the
unrealized non-cash change in the fair value of certain warrants, using the
Black-Scholes option pricing model. The non-cash gain on fair value of warrants
has no impact on our cash flows or liquidity.
Net Loss
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During the year ended December 31, 2005, we realized a net loss of
$1,472,609, as compared to a net loss of $3,356,362 during the year ended
December 31, 2004, a decrease in net loss of $1,883,753. The decrease in net
loss resulted from a $962,418 increase in revenues, a decrease in operating
expenses of $1,270,379, offset, in part, by a $126,302 increase in other
expense. A decreased loss and increased revenues directly relates to our
development activities on behalf of Cantor throughout 2005. As we concluded our
development work for Cantor upon the sale of certain assets on February 15,
2006, we will not realize revenues from this project after such date. We do,
however, anticipate realizing revenues from the sale of AWP and Section games in
the United Kingdom in late second quarter of 2006. In addition, we have reduced
our staff to six employees following the sale of certain assets to Cantor, and
do not expect to increase our current base of employees significantly given that
our AWP and Section 16 games are nearing commercialization. In the event we are
successful in consummating the acquisition briefly described in this Annual
Report, we would increase our staff through the addition of employees currently
employed by the acquisition target, while revenues would increase significantly.
There can be no assurance that we will be successful in consummating the
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Overview
As of December 31, 2005, we had cash of $122,318, accounts receivable of
$90,142 and total liabilities of $1,833,328, of which $669,683 are current
liabilities. In addition, as of December 31, 2005, we had a working capital
deficit of $457,223 and a stockholders' deficiency of $1,195,821. During the
year ended December 31, 2005, cash on hand decreased from $594,024 to $122,318.
Operating activities used net cash of $861,153 during the year ended
December 31, 2005, whereas operating activities used net cash of $2,530,387
during the year ended December 31, 2004. The net cash used in operating
activities during the year ended December 31, 2005 related primarily to our net
loss of $1,472,609, a decrease in accounts receivable of $84,478, an increase in
accounts payable of $48,080, an increase in accrued expenses of $181,769, an
increase in accrued compensation - officers of $73,842, and a decrease in
foreign taxes payable of $166,009, offset, in part, by amortization of debt
discount of $222,068. During the year ended December 31, 2004, our operating
activities used net cash of $2,530,387 related primarily to our net loss of
$3,556,362, an increase in accounts receivable of $172,645, an increase in
accounts payable of $102,298, a decrease in accrued expenses of $31,252, a
decrease in accrued compensation - officers of $59,090, and an increase in
foreign taxes payable of $19,500, offset, in part, by non-cash costs of
investment banking, strategic advisory, research, and hardware and software
documentation services of $660,403 paid through the issuance of restricted
shares of common stock with a fair value of $485,315 and the issuance of options
and warrants with a fair value of $175,088. Issuances of equity securities as
payments for services and compensation result in non-cash charges to expense.
Investing activities used $96,229 during the year ended December 31, 2005,
as compared to $114,967 during the year ended December 31, 2004. The decrease in
use of cash in investing activities reflects a $68,738 decrease in acquisition
of equipment and furnishings, offset by the $50,000 acquisition of intangible
assets from Absolute Game, Ltd.
Our financing activities provided net cash of $500,000 during the year
ended December 31, 2005, as compared to $3,227,644 during the year ended
December 31, 2004. The net cash provided by financing activities during the year
ended December 31, 2005 reflects the final $500,000 of loan proceeds received
from Cantor pursuant to the senior secured note. The net cash provided by
financing activities during the year ended December 31, 2004 reflects $2,143,242
in net proceeds from the sale of 2,445,000 shares of common stock in a private
placement, $42,852 from stockholder loans, $1,500,000 from the issuance of a
senior secured note and warrants, offset by $458,450 used to repay stockholder
loans.
Outlook
We incurred losses of $1,472,609 and $3,356,362, and negative net cash
flows from operating activities of $861,153 and $2,530,387, for the years ended
December 31, 2005 and 2004, respectively. As of December 31, 2005, we had an
accumulated deficit of $8,315,625. The foregoing raises substantial doubt about
our ability to continue as a going concern for a reasonable period of time.
-17-
Our principal objectives at this time are to (i) commence sales of AWP and
Section 16 gaming machines in the United Kingdom, and thereafter in other
European Union countries where such gaming machines are utilized, through our
manufacturing and distribution partner Electrocoin, Ltd., and (ii) to consummate
the acquisition of United States-based provider of gaming machines to the Native
American gaming marketplace. We anticipate that sales of AWP and Section 16
gaming machines will commence in late second quarter of this year. We cannot
provide any assurance as to the consummation of the acquisition noted above.
In an effort to reduce operating expenses and obtain capital for our
operations, we sold certain assets to Cantor on February 15, 2006 for $500,000.
In addition, we agreed to Cantor hiring eight of our former employees as part of
this transaction. In addition, we have closed our Las Vegas, Nevada offices and
relocated to Encino, California. We do not pay rent at this location. In
addition, our lease obligations have concluded at our office in North Sydney,
Australia, where we previously paid a monthly rate of $13,000 Australian dollars
(US$9,390 as of March 20, 2006). Commencing April 1, 2006, we will pay a nominal
monthly rental amount for use of approximately 400 square feet in this office.
It is our present intention to relocate our Australia operations to another
location in Sydney in the third quarter of 2006 and we anticipate a monthly
lease rate of approximately US$2,500 per month, or less. In the United Kingdom,
we operate out of the offices of our manufacturing and distribution partner,
Electrocoin, Ltd., in London. We do not pay rent at this location.
While we have significantly reduced our fixed monthly operating expenses,
we anticipate that for the twelve month period ending December 31, 2006, we will
require a cash infusion for further working capital and to consummate the
proposed acquisition. The amount of such cash infusion will be dependent upon
the volume, and timing, of our anticipated sales of AWP and Section 16 gaming
machines, as well as the cash component of the proposed acquisition. Further,
until such time as we achieve a measurable amount of AWP and Section 16 gaming
machines sales, our executive officers will defer all salaries payable to them.
In summary, until we generate sufficient cash from the sale of AWP and
Section 16 gaming machines, 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 existing operations and required expenditures
through the third quarter of 2006 with cash on hand. We will likely require
additional cash from the issuance of equity or debt securities in the nine
months ending September 30, 2006 to finance our ongoing operations and strategic
objectives. No assurances can be given that we will successfully obtain
liquidity sources necessary to fund our operations to profitability and beyond.
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. If that occurs, the trading price of our common stock could further
decline.
RISKS RELATED TO GAMING & ENTERTAINMENT GROUP, INC.
We have a history of significant operating losses, anticipate continued
operating losses and we may be unable to achieve profitability.
We have a history of significant operating losses. For the years ended
December 31, 2005 and 2004, we have incurred operating losses of $1,472,609 and
$3,356,362, respectively, and our operations have used $861,153 and $2,530,387
of cash, respectively. As of December 31, 2005, we had an accumulated deficit of
$8,315,625 and stockholders' deficiency of $1,195,821. We anticipate realizing
operating losses for the foreseeable future until such time as we realize
revenues from the sale of AWP and Section 16 games sufficient to offset our
operating expenses.
-18-
Our ability to continue as a going concern and achieve profitability will
depend upon a number of factors, including, among other things, market
acceptance, performance and reliability of our AWP and Section 16 gaming
machines. There can be no assurance that the foregoing will be accomplished or
that we will achieve profitability on an ongoing basis. In addition, we are
subject to risks such as uncertainty of revenues and the United Kingdom's
recently enacted tax duty on all Section 16 machines placed in gaming
establishments, which tax duty will commence in the third quarter of 2006. These
factors could have a material adverse effect on our business, financial
condition and results of operations.
We have recently sold the assets relating to the large majority of our
historical revenues and future revenues are difficult to predict
On February 15, 2006, we sold certain assets to Cantor. These assets
included our Internet gaming system and related games. Given that our historical
revenues have been largely derived from these assets, we must generate revenues
from other assets that have not yet been commercialized. While we anticipate
that we will be successful in placing AWP and Section 16 gaming machines in the
U.K. through our partner Electrocoin, based on the trial results of these
products over the last several months, such placements mark our first product
offering in land-based gaming. Accordingly, it is very difficult to predict our
future revenues. If our manufacturing and distribution partner Electrocoin is
not successful in placing a significant number of gaming machines, our business,
financial condition and results of operations may be materially adversely
affected.
There are significant uncertainties as to our proposed entrance into the
land-based gaming market.
Historically, we have been involved in the development and provision of
government accredited and gaming laboratory certified online gaming systems.
Following the sale of our Internet gaming software and certain other assets to
Cantor on February 15, 2006, we are directing our focus on the placement of AWP
and Section 16 gaming machines in the United Kingdom initially, and thereafter
in other European Union countries where these types of gaming machines are
offered.
As in any industry, product demand and market acceptance are subject to
considerable uncertainty, particularly with new products. While management
believes that we have limited our risk by partnering with Electrocoin, Ltd., an
established manufacturer and distributor of gaming machines in the markets we
intend to enter, no assurance can be made that we will be successful in
realizing revenues sufficient to achieve profitability. In the event we are not
successful in placing a significant number of AWP and Section 16 gaming
machines, our business, financial condition and results of operations could be
materially adversely affected.
We face considerable competition from established companies in the United
Kingdom and other countries where AWP and Section 16 gaming machines are
offered, and such companies generally have substantially greater capital,
research and development, manufacturing and marketing resources than we possess.
While we have a well-established manufacturing and distribution partner in
Electrocoin, Ltd., there are several well financed established providers of AWP
and Section 16 gaming machines in the U.K. that have similar product offerings
and significant market penetration. Additionally, while we believe that we offer
the first roulette machine that can be played in an AWP and Section 16 format,
there likely will be other companies who offer the same type of roulette gaming
machine in the future. Further, our competitors may be able to develop
technologies more effectively, generally have significantly more game content
than us, and may be able to adopt more aggressive pricing strategies than us.
These companies generally have longer operating histories, greater brand name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than us; provided, however, in the gaming
markets we intend to enter, Electrocoin is well known.
-19-
Our capitalization is limited and we will likely require additional
funding.
A limiting factor on our growth, including our ability to make
acquisitions in the future, is our limited capitalization. We believe that our
current cash on hand is sufficient to fund our operations through the third
quarter of this year. We will, however, likely require additional financing for
working capital purposes and to consummate an acquisition. There can be no
assurance, however, that such financing will be available to us, and if so on
reasonable terms. If we do not procure adequate financing when required, our
business, financial condition and results of operations may suffer.
Our success depends on our ability to prevent others from infringing on
our technologies.
Our success is heavily dependent upon proprietary technology. To protect
our proprietary technology, we rely principally upon copyright and trade secret
protection. All proprietary information that can be copyrighted is marked as
such. All employees and consultants are required to execute confidentiality
agreements with us. There can be no assurance that the steps taken by us in this
regard will be adequate to prevent misappropriation or independent third-party
development of our technology. Further, the laws of certain countries in which
we anticipate placing AWP and Section 16 gaming machines do not protect software
and intellectual property rights to the same extent as the laws of the United
States. While we generally require the execution of an agreement that restricts
unauthorized copying and use of our products, should unauthorized copying or
misuse of our products occur, our business, financial condition and results of
operations could be materially adversely affected.
Moreover, while the disclosure and use of our proprietary technology,
know-how and trade secrets are generally controlled under agreements with the
parties involved, there can be no assurance that all confidentiality agreements
will be honored, that others will not independently develop similar or superior
technology, that disputes will not arise concerning the ownership of
intellectual property, or that dissemination of our proprietary technology,
know-how and trade secrets will not occur. Further, if an infringement claim is
brought against us, litigation would be costly and time consuming, but may be
necessary to protect our proprietary rights and to defend ourselves. We could
incur substantial costs and diversion of management resources in the defense of
any claims relating to the proprietary rights of others or in asserting claims
against others.
We are dependent on our key personnel, and the loss of any could
adversely affect our business.
We depend on the continued performance of the members of our management
team and our technology team. Tibor N. Vertes, our Chief Executive Officer and
Chairman, Gregory L. Hrncir, our President and a Director, and Simon Daniel, our
Chief Technology Officer have each contributed significantly to our business. If
we lose the services of any of the foregoing parties, and are unable to locate
suitable replacements for such persons in a timely manner, it could have a
material adverse effect on our business.
Currency rate fluctuations can have an adverse effect on our business
operations.
Our wholly-owned foreign operating subsidiaries include Gaming &
Entertainment Technology Pty Ltd, an Australian company utilizing Australian
dollars as its functional currency, and Gaming & Entertainment Ltd., a United
Kingdom company utilizing pounds sterling as its functional currency. Future
sales of AWP and Section 16 gaming machine sales will be made in pounds sterling
in the United Kingdom and in Euros in other European Union countries where sold.
Given that our financial results are reported in United States dollars, which is
subject to fluctuations in respect of the currencies of the countries in which
we anticipate placing products, fluctuations in the exchange rate of the U.S.
dollar to pounds sterling and Euros could have a positive or negative effect on
our reported results. Given the constantly changing currency exposures and the
substantial volatility of currency exchange rates, we cannot predict the effect
of exchange rate fluctuations upon future operating results. We do not currently
have a hedging program to mitigate currency risk, and do not presently intend to
implement one. Thus, there can be no assurance that we will not experience
currency losses in the future, which could have a material adverse effect on our
business, revenues, operating results and financial condition.
-20-
Worsening economic conditions may adversely affect our business.
The demand for entertainment and leisure activities tends to be highly
sensitive to the disposable incomes of consumers and thus a decline in general
economic conditions may lead to our end-users having less discretionary income
with which to wager, the result of which could affect our business, financial
condition and results of operations.
Although we have entered into confidentiality and non-compete
agreements with our employees, if we are unable to protect our proprietary
information against unauthorized use by others, our competitive position
could be harmed.
Our proprietary information is critically important to our competitive
position and is a significant aspect of the products we intend to offer
commencing in the late second quarter of this year. If we are unable to protect
our proprietary information against unauthorized use by others, our competitive
position could be harmed. While we have and continue to enter into
confidentiality and non-compete agreements with our employees, along with
controlling access to and distribution of our documentation and other
proprietary information, we cannot make assurances that these strategies will be
adequate to prevent misappropriation of our proprietary information. Therefore,
we could be required to expend significant amounts to defend our rights to
proprietary information in the future if a breach were to occur.
Our anticipated future revenues are expected to be extremely concentrated,
and revenues for 2005 were derived solely from Cantor.
All of our reported revenues for 2005 have been derived from the exclusive
license of our Internet gaming system to Cantor. Cantor has been our sole source
of revenue in 2006 as well through the date of the sale of assets consummated on
February 15, 2006. Our anticipated future revenues, relating to the placement of
AWP and Section 16 gaming machines, will be made solely through our
manufacturing and distribution partner Electrocoin Ltd. Electrocoin is our
exclusive distributor, but also manufactures and distributes its own gaming
machines as well as on behalf of other third parties. Our future revenues for
AWP and Section 16 gaming machine sales will be entirely dependent on the
efforts of Electrocoin as we have no intention of selling and marketing the
gaming machines. Consequently, we do not have control over the volume of AWP and
Section 16 gaming machines placed and the revenues derived therefrom.
RISKS RELATED TO OUR COMMON STOCK
Our stock price has been and may continue to be volatile and our trading
volume is extremely limited.
The market price of our common shares has experienced significant
fluctuations and may continue to fluctuate significantly due to various factors,
some of which are beyond our control, such as market acceptance of our AWP and
Section 16 gaming products, technological innovation by our competitors,
quarterly variations in our revenue and results of operations, general market
conditions or market conditions specific to particular industries, including the
gaming sector. In addition, given the extremely limited trading volume in our
common stock, stockholders seeking to liquidate all or some of their holdings
may experience difficulty in doing so.
-21-
Our common stock is deemed to be "penny stock," which may make it more
difficult for our stockholders to resell their shares due to suitability
requirements.
Historically, our common stock has been deemed to be "penny stock" as that
term is defined in Rule 3a51-1 promulgated under the Exchange Act. Penny stock
may be more difficult for investors to resell. Penny stocks are stocks:
o Having a price of less than $5.00 per share
o Not traded on a "recognized" national exchange
o Not quoted on the Nasdaq automated quotation system (Nasdaq-listed
stock must still have a price of not less than $5.00 per share); or
o Of issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
The closing bid price for our common stock on the OTC Bulletin Board on
March 20, 2006, was $0.35.
Under the penny stock regulations, a broker-dealer selling penny stock to
anyone other than an established customer or "accredited investor," generally,
an individual with net worth in excess of US$1,000,000 or an annual income
exceeding US$200,000, or US$300,000 together with his or her spouse, must make a
special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the
broker-dealer or the transaction is otherwise exempt. In addition, the penny
stock regulations require the broker-dealer to deliver, prior to any transaction
involving a penny stock, a disclosure schedule prepared by the Commission
relating to the penny stock market, unless the broker-dealer or the transaction
is otherwise exempt. A broker-dealer is also required to disclose commissions
payable to the broker-dealer and the registered representative and current
quotations for the securities. Finally, a broker-dealer is required to send
monthly statements disclosing recent price information with respect to the penny
stock held in a customer's account and information with respect to the limited
market in penny stocks.
We do not anticipate issuing dividends to our stockholders.
We do not anticipate issuing dividends to our stockholders in the
foreseeable future. In the event we achieve profitability in the future, the
issuance of dividends will be at the discretion of our board of directors and
will depend on, among other things, our earnings, financial condition, capital
requirements, level of indebtedness, statutory and contractual restrictions
applying to the payment of dividends, and other considerations that our board of
directors deems relevant. Accordingly, stockholders may have to sell some or all
of their common stock in order to generate cash flow from their investment.
We have a significant number of outstanding options and warrants that
could materially dilute existing shareholders.
-22-
As of March 20, 2006, there were outstanding options and warrants to
purchase an aggregate of up to 8,476,622, with a weighted average exercise price
of $0.64. Of this amount, Cantor holds warrants to purchase 5,703,704 shares of
common stock (exercisable through December 8, 2009 and assumes that Cantor's
warrant to purchase $2,000,000 of our common stock is exercised at $0.54 per
share), there are options outstanding to purchase 1,906,168 shares of common
stock pursuant to our 2004 Stock Option and Incentive Plan, and there are
outstanding warrants to purchase (i) 366,750 shares of common stock held by
underwriters relating to our private placement in 2004, and (ii) 500,000 shares
of common stock issued in conjunction with the purchase of Absolute Game, Ltd.
in 2005. All of the outstanding options and warrants are immediately
exercisable. If all of the options and warrants are exercised, our common
stockholders will experience significant dilution; provided, however, we would
receive $5,425,038 if all outstanding options and warrants were exercised with
cash.
-23-
ITEM 7. FINANCIAL STATEMENTS.
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm...................24
Consolidated Balance Sheet
December 31, 2005...................................................25
Consolidated Statements of Operations
Years Ended December 31, 2005 and 2004..............................26
Consolidated Statements of Stockholders' Deficiency
Years Ended December 2005 and 2004..................................27
Consolidated Statements of Cash Flows
Years Ended December 31, 2005 and 2004..............................28
Notes to Consolidated Financial Statements................................29
-24-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Gaming & Entertainment Group, Inc.
We have audited the accompanying consolidated balance sheet of Gaming &
Entertainment Group, Inc. and Subsidiaries as of December 31, 2005, and the
related consolidated statements of operations, stockholders' deficiency and cash
flows for the years ended December 31, 2005 and 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Gaming &
Entertainment Group, Inc. and Subsidiaries as of December 31, 2005, and their
results of operations and cash flows for the years ended December 31, 2005 and
2004, in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As further discussed in Note
2 to the consolidated financial statements, the Company's operations have
generated recurring losses and negative net cash flows from operating
activities, and it had an accumulated deficit and a stockholders' deficiency as
of December 31, 2005. Such matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
reported amounts or the amounts and classifications of liabilities that might
result from the outcome of this uncertainty.
As discussed in Note 3, the Company has restated its consolidated financial
statements for the year ended December 31, 2004.
/s/ J. H. Cohn LLP
Roseland, New Jersey
March 27, 2006
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2005
ASSETS
Current Assets
Cash $ 122,318
Accounts receivable 90,142
-----------
Total current assets 212,460
Equipment and Furnishings, net of accumulated
depreciation of $317,858 132,625
Intangible Assets, net of accumulated
amortization of $31,350 282,150
Other Assets 10,272
-----------
Total assets $ 637,507
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 163,998
Accrued expenses 229,598
Accrued compensation - officers 220,539
Notes payable - officers 55,548
-----------
Total current liabilities 669,683
Senior Secured Note Payable, net of
unamortized debt discount of $869,407 1,130,593
Deferred Rent 33,052
-----------
Total liabilities 1,833,328
-----------
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 6,783,528
Accumulated deficit (8,315,625)
Accumulated other comprehensive income
- foreign currency translation gains 137,970
-----------
Total stockholders' deficiency (1,195,821)
-----------
Total liabilities and stockholders' deficiency $ 637,507
===========
See Notes to Consolidated Financial Statements
-26-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2005 and 2004
2004
2005 (Restated)
------------ ------------
Revenues:
Services $ 1,251,016 $ 312,401
Product 23,803 --
------------ ------------
Total revenues 1,274,819 312,401
------------ ------------
Cost of revenues:
Services 507,348 305,343
Product 20,737 --
------------ ------------
Total cost of revenues 528,085 305,343
------------ ------------
Gross margin 746,734 7,058
------------ ------------
Operating expenses:
Research and development 459,029 712,467
Selling, general and administrative 1,428,285 2,445,226
------------ ------------
Total operating expenses 1,887,314 3,157,693
------------ ------------
Operating loss (1,140,580) (3,150,635)
------------ ------------
Other income (expense):
Interest expense and amortization
of debt discount (419,377) (81,380)
Foreign currency transaction loss -- (14,170)
Other income 164,613 39,999
Gain on fair value of warrants 2,717 23,305
Fair value of penalty common stock (79,982) (173,481)
------------ ------------
Total other expense (332,029) (205,727)
------------ ------------
Net loss $ (1,472,609) $ (3,356,362)
------------ ------------
Weighted average number of shares
outstanding 19,665,724 17,726,004
============ ============
Net loss per share - basic and
diluted $ (0.07) $ (0.19)
============ ============
See Notes to Consolidated Financial Statements
-27-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficiency
Years ended December 31, 2005 and 2004 (Restated)
Additional
Paid-in Accumulated
Common Stock Capital Deficit
--------------- --------------- --------------- ---------------
Shares Amount
--------------- --------------- --------------- ---------------
Balance at January 1, 2004 11,947,872 $ 11,948 $ 2,538,678 $ (3,486,654)
Common stock issuance costs -- -- (301,758) --
Effects of reverse acquisition 4,058,756 148,118 (180,170) --
Warrants issued through private
placement -- -- (26,022) --
Common stock issued for services 507,390 5,074 480,241 --
Options and warrants issued to
nonemployees for services -- -- 175,088 --
Warrants issued in connection
with senior secured note payable -- -- 1,110,340 --
Foreign currency translation loss
(A) -- -- -- --
Net loss -- -- -- (3,356,362)
--------------- --------------- --------------- ---------------
Balance at December 31, 2004 as
restated 16,514,018 165,140 3,796,397 (6,843,016)
Reclassifications of proceeds
from sale of common stock and
warrants with registration
rights through private placement 2,445,000 24,450 2,420,550 --
Reclassifications of common stock
and warrants issued for
equipment 58,334 583 57,751 --
Shares issued for late
registration filing 563,250 5,633 247,830 --
Shares issued in exchange for
purchase of intangible assets 250,000 2,500 125,000 --
Warrants issued in exchange for
purchase of intangible assets -- -- 136,000 --
Foreign currency translation loss
(A) -- -- -- --
Net loss -- -- -- (1,472,609)
--------------- --------------- --------------- ---------------
Balance at December 31, 2005 19,830,602 $ 198,306 $ 6,783,528 $ (8,315,625)
=============== =============== =============== ===============
Accumulated
Other
Comprehensive
Income Total
---------------- ---------------
Balance at January 1, 2004 $ 206,766 $ (729,262)
Common stock issuance costs -- (301,758)
Effects of reverse acquisition -- (32,052)
Warrants issued through private
placement -- (26,022)
Common stock issued for services -- 485,315
Options and warrants issued to
nonemployees for services -- 175,088
Warrants issued in connection
with senior secured note payable -- 1,110,340
Foreign currency translation loss
(A) (59,350) (59,350)
Net loss -- (3,356,362)
--------------- ---------------
Balance at December 31, 2004 as
restated 147,416 (2,734,063)
Reclassifications of proceeds
from sale of common stock and
warrants with registration
rights through private placement -- 2,445,000
Reclassifications of common stock
and warrants issued for -- 58,334
equipment
Shares issued for late
registration filing -- 253,463
Shares issued in exchange for
purchase of intangible assets -- 127,500
Warrants issued in exchange for
purchase of intangible assets -- 136,000
Foreign currency translation loss
(A) (9,446) (9,446)
Net loss -- (1,472,609)
--------------- ---------------
Balance at December 31, 2005 $ 137,970 $ (1,195,821)
=============== ===============
(A) Comprehensive loss (net loss plus or minus foreign currency translation
loss or gain) for the year ended December 31, 2005 and 2004 totaled
$1,482,055 and $3,415,712, respectively.
See Notes to Consolidated Financial Statements
-28-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2005 and 2004
2004
2005 (Restated)
------------ ------------
Cash flows from operating activities
Net loss $ (1,472,609) $ (3,356,362)
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 222,068 18,865
Amortization of intellectual property 31,350 --
Depreciation expense 73,325 91,927
Shares issued for services -- 485,315
Options and warrants issued to nonemployees for
services -- 175,088
Gain on fair value of warrants (2,717) (23,305)
Fair value of penalty common stock 79,982 173,481
Deferred rent (14,713) 47,765
Changes in operating assets and liabilities:
Accounts receivable 84,478 (172,645)
Prepaid expenses -- 10,000
Other assets -- (9,553)
Accounts payable 48,080 102,298
Accrued expenses 181,770 (31,252)
Accrued compensation - officers 73,842 (59,090)
Foreign taxes payable (166,009) 19,500
------------ ------------
Net cash used in operating activities (861,153) (2,530,387)
------------ ------------
Cash flows from investing activities
Acquisition of intangible assets (50,000) --
Acquisition of equipment and furnishings (46,229) (114,967)
------------ ------------
Net cash used in investing activities (96,229) (114,967)
------------ ------------
Cash flows from financing activities
Repayments of related party loans -- (458,450)
Proceeds from the issuance of senior secured
note and warrants 500,000 1,500,000
Proceeds of related party loan -- 42,852
Net proceeds from sale of common stock and
warrants -- 2,143,242
------------ ------------
Net cash provided by financing activities 500,000 3,227,644
------------ ------------
Effect of exchange rate changes on cash (14,324) (74,581)
------------ ------------
Net increase (decrease) in cash (471,706) 507,709
Cash, beginning of year 594,024 86,315
------------ ------------
Cash, end of year $ 122,318 $ 594,024
============ ============
Supplemental disclosure of cash flow information
Interest paid $ -- $ 64,165
============ ============
Supplemental schedule of noncash investing and
financing activities:
Intangible assets purchased in exchange for
common stock and warrants $ 263,500 $ --
============ ============
Shares of common stock and warrants issued
for equipment $ -- $ 58,334
============ ============
See Notes to Consolidated Financial Statements
-29-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 amusement with prizes ("AWP") and Section 16
gaming machines for the United Kingdom and European gaming markets.
Historically, the Company has primarily been involved in the development of
Internet gaming system and games for third parties.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying 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 $1,472,609 and $3,356,362 and
negative cash flows from operating activities of $861,153 and $2,530,387 for the
years ended December 31, 2005 and 2004, respectively, and recurring losses in
prior years. As of December 31, 2005, the Company had an accumulated deficit of
$8,315,625 and a stockholders' deficiency of $1,195,821. 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 December 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. The Company
anticipates that it will require additional funding through the issuance of
equity or debt securities later this year. Management anticipates that
additional funding of not less than $250,000 will be necessary to fund the
Company's operations through December 31, 2006. Management believes, but cannot
assure, that the Company will be able to obtain such financing and continue its
operations through at least December 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 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.
-30-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) 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.
(c) 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.
(d) 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 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 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 based upon a percentage of the gross win.
When the Company receives a percentage of the gaming revenues generated by its
client's Internet gaming sites, it will recognize such revenues when earned.
Revenue from gaming machines that are sold will be recognized upon completion of
installation and acceptance by the gaming establishment, provided collectibility
is reasonably assured.
(e) Equipment and Furnishings
Equipment and furnishings are stated at cost, net of accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Improvements to leased properties are amortized
using the straight-line method over their estimated useful lives or the
remaining lease period, whichever is shorter.
(f) Impairment of Long Lived Assets
Impairment losses on long-lived assets, such as equipment, are recognized when
events or changes in circumstances indicate that the undiscounted cash flows
estimated to be generated by such assets are less than their carrying value and,
accordingly, all or a portion of such carrying value may not be recoverable.
Impairment losses are then measured by comparing the fair value of assets to
their carrying amounts.
-31-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(g) 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 Standard 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.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
123R"), which is a revision to SFAS 123. SFAS 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. Primarily, SFAS 123R focuses on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments.
SFAS 123R requires the Company to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award. That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award, which is
usually the vesting period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service.
In accordance with the Securities and Exchanges Commission's Staff Accounting
Bulletin 107, SFAS 123R is effective as of the beginning of the annual reporting
period that begins after December 15, 2005. Under these guidelines, the Company
will adopt SFAS 123R as of January 1, 2006. The Company expects the adoption of
SFAS 123R will have a significant adverse impact on its future results of
operations.
The exercise price of all of the options granted to employees has been equal to
or greater than the stock price 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 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:
-32-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Years Ended
December 31,
---------------------------
2005 2004
(Restated)
------------ ------------
Net loss, as reported $ (1,472,609) $ (3,356,362)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards (2,486) (464,307)
------------ ------------
Pro forma net loss $ (1,475,095) $ (3,820,669)
============ ============
Basic and diluted loss per common share as
reported $ (0.07) $ (0.19)
============ ============
Basic and diluted loss per common share pro
forma $ (0.08) $ (0.22)
============ ============
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.
(h) 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 which
includes shares outstanding subject to continuing registration in 2004. 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 years ended December 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 December 31, 2005 and 2004,
the Company had options and warrants outstanding for the purchase of 15,889,918
and 19,754,565 shares of common stock, respectively, that were not included in
the computation of diluted loss per share.
(i) Research and Development
Research and development costs are expensed as incurred.
(j) Foreign Currency Translation
The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. Accordingly, gains and losses from the translation
of the financial statements of the foreign subsidiaries are reported as a
separate component of accumulated other comprehensive income. Assets and
liabilities in foreign currencies (primarily Australian dollars as of December
31, 2005) are translated using the exchange rate at the balance sheet date.
Revenues and expenses are translated at average exchange rates during the year.
Foreign currency transaction gains and losses are included in net loss.
-33-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(k) Credit Risk Concentration
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable.
The Company maintains cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced, and management does
not expect, any losses on these accounts. Management also believes that the
Company is not subject to any significant concentrations of credit risk related
to accounts receivable at this time.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recorded based on the temporary differences
between the financial statement and the tax bases of assets and liabilities and
for net operating loss carryforwards measured using the enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company periodically evaluates the realizability of its net deferred tax assets
and records a valuation allowance if, based on the weight of available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized.
(m) Intangible Assets
Intangible assets, which consist of intellectual property, are recorded at cost
and amortized on a straight-line basis over their estimated useful lives of 5
years.
(n) Effect of Recently Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS 151"),
which is an amendment of ARB No. 43. SFAS 151 requires idle facility expenses,
freight, handling costs, and wasted material (spoilage) costs to be recognized
as current-period charges. It also requires that allocation of fixed production
overhead costs to the cost of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 will be effective for the Company beginning
January 1, 2006 and resulting adjustments will be made on a prospective basis.
We do not anticipate that the adoption of this standard will have a significant
impact on our business, results of operations or financial position.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29" ("SFAS 153"). The guidance in APB Opinion No.
29, "Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in APB 29, however, included certain exceptions
to that principle. SFAS 153 amends APB 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for nonmonetary exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected
to have a material impact on the Company's financial position and results of
operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"), which is a replacement of APB Opinion No. 20,
"Accounting Changes", and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements". SFAS 154 changes the requirements for the accounting for
and reporting a change in an accounting principle. Previously, most voluntary
changes in accounting principle required recognition of a cumulative effect
adjustment in the results of operations of the period of change. SFAS 154
requires retrospective application to prior periods unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS 154 is effective for accounting changes and corrections of errors
made in years beginning after December 15, 2005; however, it does not change the
transition provisions of any existing accounting pronouncements, such as SFAS
123R. We do not believe the adoption of SFAS 154 will have a material effect on
our business, financial position, or results of operations.
-34-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(o) Reclassifications
Certain amounts for the year ended December 31, 2004 have been reclassified to
conform to the presentation of the December 31, 2005 amounts.
NOTE 3 - RESTATEMENT FOR EQUITY ISSUED WITH REGISTRATION RIGHTS
On May 31, 2004, the Company received proceeds of $2,143,242, net of expenses of
$301,758, from the sale of 244.5 units to investors at a price of $10,000 per
unit through a private placement. Each unit consisted of 10,000 shares of common
stock and a warrant to purchase 10,000 shares of common stock at $1.50 per
share. The warrants expired on May 31, 2005. Pursuant to the private placement,
the Company was obligated to file a registration statement (the "Registration
Statement") no later than July 15, 2004.
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 on March 3, 2005.
The Emerging Issues Task Force ("EITF") is currently reviewing the accounting
for securities with liquidated damages clauses as stated in EITF 05-04, "The
Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
Subject to EITF 00-19" ("EITF 05-04"). There are currently several views as to
how to account for this type of transaction and the EITF has not yet reached a
consensus. In accordance with EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed To, and Potentially Settled in the Company's Own Stock,"
("EITF 00-19") and EITF 05-04, because the maximum potential liquidated damages
for failure to file and have the registration statement declared effective is
greater than the difference between the fair value of registered and
unregistered shares, the value of the common stock subject to such registration
rights should be classified as temporary equity. Additionally, in accordance
with EITF 00-19 and the terms of the above warrants, the fair value of the
warrants should be recorded as a liability, with an offsetting reduction to
stockholders' equity. The warrant liability is initially measured at fair value
using the Black-Scholes option pricing model, and is then re-valued at each
reporting date, with changes in the fair value reported as non-cash charges or
credits to earnings.
The SEC recently announced its interpretation of the accounting for common stock
and warrants with registration rights under EITF 00-19. The SEC concluded that
for agreements containing registration rights where significant liquidated
damages could be required to be paid to the holder of the instrument in the
event the issuer fails to maintain the effectiveness of a registration statement
for a preset time period, the common stock subject to such liquidated damages
does not meet the tests required for stockholders' equity classification and
accordingly must be reflected between liabilities and stockholders' equity in
the balance sheet until the conditions are eliminated. In analyzing instruments
under EITF 00-19, the SEC concluded that the likelihood or probability related
to the failure to maintain an effective registration statement is not a factor.
-35-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Historically, the Company classified the common stock and warrants with
registration rights described above as stockholders' equity, as it believed
these securities met the requirements necessary to record them as stockholders'
equity. After further review in accordance with the SEC's recent interpretation
of EITF 00-19 as it relates to these common shares and warrants subject to
registration rights, the Company has concluded that its financial statements for
the year ended December 31, 2004, and interim periods ended September 30, 2004,
and March 31, 2005, will be restated. The restatement includes the
reclassification of common stock subject to registration rights from
stockholders' equity and into temporary equity, and the inclusion of the
liability for the fair value of penalty common stock as of forty five (45) days
after the closing date (July 15, 2004).
Based on the above determination, as of December 31, 2004, the Company
reclassified $2,445,000 of common stock subject to registration rights from
stockholders' equity and into temporary equity. On March 3, 2005, 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. Accordingly,
the Company reclassified $2,445,000 from temporary equity and into stockholders'
equity.
In addition, the Company measured the initial fair value of the warrants on the
closing date at $26,022 and recorded the fair value to warrant liability. At the
end of each reporting period, the value of the warrants was re-measured based on
the fair value of the underlying shares, and changes to the warrant liability
and related "gain or loss in fair value of the warrants" was recorded as a
non-cash charge or credit to earnings. The warrant liability was cancelled when
the warrants expired on May 31, 2005.
The fair value of the warrants was estimated using the Black-Scholes
option-pricing model, with the following assumptions: risk-free interest rate of
4.13% to 4.50%, dividend yield of 0%, expected life of 0.67 to 0.17 years and
volatility range of 71.01% to 86.32% were used.
For the years ended December 31, 2005 and 2004, the non-cash gain on fair value
of warrants was $2,717 and $23,305 respectively. The gain on fair value of
warrants is due principally to the decrease in the market value of the common
stock of the Company. The non-cash gain on fair value of warrants has no effect
on the Company's cash flows or liquidity.
In addition, the Company measured the initial fair value of the penalty common
stock to be $86,365, and recorded as a non-cash charge. At the end of each
reporting period, the increase in the penalty common stock was valued based on
the fair value of the underlying shares, and changes to the penalty common stock
liability and related non-cash charge was recorded. The penalty common stock
liability was reclassified to stockholders' equity when the shares of common
stock were registered under the Registration Statement on Form S-3 filed with
the Securities and Exchange Commission and declared effective on March 3, 2005
and the shares of common stock were issued.
The restatement adjustments to the Company's consolidated balance sheets and
statements of operations for the year ended December 31, 2004 and interim
periods ended March 31, 2005, September 30, 2005 and 2004, and June 30, 2005 are
summarized below. Restated statements of cash flows for the interim periods have
not been presented. The restatement adjustment had no effect on previously
reported total operating, investing and financing activities.
-36-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Balance Sheet September 30, 2004 (unaudited)
As
Previously Restatement
Reported Adjustment As Restated
9/30/04 9/30/04 9/30/04
-------------- -------------- --------------
ASSETS
Current Assets
Cash $ 36,646 $ -- $ 36,646
Accounts receivable 60,000 -- 60,000
Prepaid expenses 21,790 -- 21,790
-------------- -------------- --------------
Total current assets 118,436 -- 118,436
Equipment, net of accumulated depreciation of $211,994 161,608 -- 161,608
Other Assets 706 -- 706
-------------- -------------- --------------
Total assets $ 280,750 $ -- $ 280,750
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 219,496 $ -- $ 219,496
Accrued expenses 46,428 -- 46,428
Current portion of notes payable - officers 171,600 -- 171,600
Foreign taxes payable 148,476 -- 148,476
Loan from stockholder 43,007 -- 43,007
Warrant liability -- 26,022 26,022
Penalty Common Stock subject to continuing registration -- 86,365 86,365
-------------- -------------- --------------
Total current liabilities 629,007 112,387 741,394
Senior secured note payable 250,000 -- 250,000
Notes payable - officers, net of current portion 40,891 -- 40,891
-------------- -------------- --------------
Total liabilities 919,898 112,387 1,032,285
-------------- -------------- --------------
Commitments and Contingencies
Common Stock with Registration Rights:
Common Stock subject to continuing registration, $0.0001 par
value, 2,445,000 shares issued and outstanding -- 2,445,000 2,445,000
Common Stock issued for equipment subject to continuing
registration, $0.0001 par value, 58,334 shares issued and -- 58,334 58,334
outstanding
-------------- -------------- --------------
-- 2,503,334 2,503,334
-------------- -------------- --------------
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; 16,514,018 shares issued and outstanding 190,173 (25,033) 165,140
Additional paid-in capital 5,190,380 (2,504,323) 2,686,057
Accumulated deficit (6,182,261) (86,365) (6,268,626)
Accumulated other comprehensive income - foreign currency
translation gains 162,560 -- 162,560
-------------- -------------- --------------
Total stockholders' deficiency (639,148) (2,615,721) (3,254,869)
-------------- -------------- --------------
Total liabilities and stockholders' deficiency $ 280,750 $ -- $ 280,750
============== ============== ==============
-37-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Balance Sheet December 31, 2004
As
Previously Restatement
Reported Adjustment As Restated
12/31/04 12/31/04 12/31/04
-------------- -------------- --------------
ASSETS
Current Assets
Cash $ 594,024 $ -- $ 594,024
Accounts receivable 182,710 -- 182,710
-------------- -------------- --------------
Total current assets 776,734 -- 776,734
Equipment and Furnishings, net of accumulated depreciation of
$295,171 162,580 -- 162,580
Other Assets 10,321 -- 10,321
-------------- -------------- --------------
Total assets $ 949,635 $ -- $ 949,635
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 129,292 $ -- $ 129,292
Accrued expenses 50,330 -- 50,330
Accrued compensation - officers 32,692 -- 32,692
Current portion of notes payable - officers 169,553 -- 169,553
Foreign taxes payable 166,009 -- 166,009
Warrant liability -- 2,717 2,717
Penalty Common Stock subject to continuing registration -- 173,481 173,481
-------------- -------------- --------------
Total current liabilities 547,876 176,198 724,074
Senior secured note payable, net of unamortized debt discount of
$1,091,475 408,525 -- 408,525
Deferred rent 47,765 -- 47,765
-------------- -------------- --------------
Total liabilities 1,004,166 176,198 1,180,364
-------------- -------------- --------------
Commitments and Contingencies
Common Stock with Registration Rights:
Common Stock subject to continuing registration, $0.0001 par
value, 2,445,000 shares issued and outstanding -- 2,445,000 2,445,000
Common Stock issued for equipment subject to continuing
registration, $0.0001 par value, 58,334 shares issued and
outstanding -- 58,334 58,334
-------------- -------------- --------------
-- 2,503,334 2,503,334
-------------- -------------- --------------
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; 16,514,018 shares issued and outstanding 190,173 (25,033) 165,140
Additional paid-in capital 6,300,720 (2,504,323) 3,796,397
Accumulated deficit (6,692,840) (150,176) (6,843,016)
Accumulated other comprehensive income - foreign currency
translation gains 147,416 -- 147,416
-------------- -------------- --------------
Total stockholders' deficiency (54,531) (2,679,532) (2,734,063)
-------------- -------------- --------------
Total liabilities and stockholders' deficiency $ 949,635 $ -- $ 949,635
============== ============== ==============
-38-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Balance Sheet March 31, 2005 (unaudited)
As
Previously Restatement
Reported Adjustment As Restated
3/31/05 3/31/05 3/31/05
-------------- -------------- --------------
ASSETS
Current Assets
Cash $ 367,506 $ -- $ 367,506
Accounts receivable 106,200 -- 106,200
-------------- -------------- --------------
Total current assets 473,706 -- 473,706
Equipment and Furnishings, net of accumulated depreciation of
$281,123 143,335 -- 143,335
Intangible Assets 313,500 -- 313,500
Other Assets 10,312 -- 10,312
-------------- -------------- --------------
Total assets $ 940,853 $ -- $ 940,853
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 140,028 $ -- $ 140,028
Accrued expenses 84,737 -- 84,737
Accrued compensation - officers 70,192 -- 70,192
Current portion of notes payable - officers 127,048 -- 127,048
-------------- -------------- --------------
Total current liabilities 422,005 -- 422,005
Senior secured note payable, net of unamortized debt discount of
$1,035,958 714,042 -- 714,042
Deferred rent 39,666 -- 39,666
-------------- -------------- --------------
Total liabilities 1,175,713 -- 1,175,713
-------------- -------------- --------------
Commitments and Contingencies
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 -- 198,306
Additional paid-in capital 6,556,087 227,441 6,783,528
Accumulated deficit (7,132,799) (227,441) (7,360,240)
Accumulated other comprehensive income - foreign currency
translation gains 143,546 -- 143,546
-------------- -------------- --------------
Total stockholders' deficiency (234,860) -- (234,860)
-------------- -------------- --------------
Total liabilities and stockholders' deficiency $ 940,853 $ -- $ 940,853
============== ============== ==============
-39-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Balance Sheet June 30, 2005 (unaudited)
As
Previously Restatement
Reported Adjustment As Restated
6/30/05 6/30/05 6/30/05
-------------- -------------- --------------
ASSETS
Current Assets
Cash $ 312,431 $ -- $ 312,431
Accounts receivable 115,758 -- 115,758
-------------- -------------- --------------
Total current assets 428,189 -- 428,189
Equipment and Furnishings, net of accumulated depreciation of
$295,635 130,670 -- 130,670
Intangible Assets 313,500 -- 313,500
Other Assets 10,304 -- 10,304
-------------- -------------- --------------
Total assets $ 882,663 $ -- $ 882,663
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 69,814 $ -- $ 69,814
Accrued expenses 133,552 -- 133,552
Accrued compensation - officers 107,691 -- 107,691
Current portion of notes payable - officers 84,147 -- 84,147
-------------- -------------- --------------
Total current liabilities 395,204 -- 395,204
Senior secured note payable, net of unamortized debt discount of
$980,441 1,019,559 -- 1,019,559
Deferred rent 37,461 -- 37,461
-------------- -------------- --------------
Total liabilities 1,452,224 -- 1,452,224
-------------- -------------- --------------
Commitments and Contingencies
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 -- 198,306
Additional paid-in capital 6,556,087 227,441 6,783,528
Accumulated deficit (7,470,426) (227,441) (7,697,867)
Accumulated other comprehensive income - foreign currency
translation gains 146,472 -- 146,472
-------------- -------------- --------------
Total stockholders' deficiency (569,561) -- (569,561)
-------------- -------------- --------------
Total liabilities and stockholders' deficiency $ 882,663 $ -- $ 882,663
============== ============== ==============
-40-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Balance Sheet September 30, 2005 (unaudited)
As
Previously Restatement
Reported Adjustment As Restated
9/30/05 9/30/05 9/30/05
-------------- -------------- --------------
ASSETS
Current Assets
Cash $ 122,049 $ -- $ 122,049
Accounts receivable 98,454 -- 98,454
-------------- -------------- --------------
Total current assets 220,503 -- 220,503
Equipment and Furnishings, net of accumulated depreciation of
$311,143 151,212 -- 151,212
Intangible Assets, net of accumulated amortization of $15,675 297,825 -- 297,825
Other Assets 10,302 -- 10,302
-------------- -------------- --------------
Total assets $ 679,842 $ -- $ 679,842
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 55,249 $ -- $ 55,249
Accrued expenses 186,087 -- 186,087
Accrued compensation - officers 156,025 -- 156,025
Current portion of notes payable - officers 55,548 -- 55,548
-------------- -------------- --------------
Total current liabilities 452,909 -- 452,909
Senior secured note payable, net of unamortized debt discount of
$924,924 1,075,076 -- 1,075,076
Deferred rent 35,257 -- 35,257
-------------- -------------- --------------
Total liabilities 1,563,242 -- 1,563,242
-------------- -------------- --------------
Commitments and Contingencies
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 -- 198,306
Additional paid-in capital 6,556,087 227,441 6,783,528
Accumulated deficit (7,783,289) (227,441) (8,010,730)
Accumulated other comprehensive income - foreign currency
translation gains 145,496 -- 145,496
-------------- -------------- --------------
Total stockholders' deficiency (883,400) -- (883,400)
-------------- -------------- --------------
Total liabilities and stockholders' deficiency $ 679,842 $ -- $ 679,842
============== ============== ==============
-41-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Statement of Operations for the Nine Months Ended
September 30, 2004 (unaudited)
As
Previously Restatement
Reported Adjustment As Restated
9/30/04 9/30/04 9/30/04
-------------- -------------- --------------
Revenues:
Services $ 140,894 $ -- $ 140,894
Product -- -- --
-------------- -------------- --------------
Total revenues 140,894 -- 140,894
-------------- -------------- --------------
Cost of revenues:
Services 37,462 -- 37,462
Product -- -- --
-------------- -------------- --------------
Total cost of revenues 37,462 -- 37,462
-------------- -------------- --------------
Gross margin 103,432 -- 103,432
-------------- -------------- --------------
Operating expenses:
Research and development 711,772 -- 711,772
Selling, general and administrative 2,053,686 -- 2,053,686
-------------- -------------- --------------
Total operating expenses 2,765,458 -- 2,765,458
-------------- -------------- --------------
Operating loss (2,662,026) -- (2,662,026)
-------------- -------------- --------------
Other income (expense):
Interest expense (42,009) -- (42,009)
Foreign currency transaction loss (14,170) -- (14,170)
Other income 22,598 -- 22,598
Fair value of penalty common stock -- (86,365) (86,365)
-------------- -------------- --------------
Total other income (expense) (33,581) (86,365) (119,946)
-------------- -------------- --------------
Net loss $ (2,695,607) $ (86,365) $ (2,781,972)
-------------- -------------- --------------
Weighted average number of shares
outstanding 17,292,412 17,292,412 17,292,412
============== ============== ==============
Net loss per share - basic and diluted $ (0.16) $ 0.00 $ (0.16)
============== ============== ==============
-42-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Statement of Operations for the Three Months Ended
September 30, 2004 (unaudited)
As
Previously Restatement
Reported Adjustment As Restated
9/30/04 9/30/04 9/30/04
-------------- -------------- --------------
Revenues:
Services $ 65,554 $ -- $ 65,554
Product -- -- --
-------------- -------------- --------------
Total revenues 65,554 -- 65,554
-------------- -------------- --------------
Cost of revenues:
Services 37,462 -- 37,462
Product -- -- --
-------------- -------------- --------------
Total cost of revenues 37,462 -- 37,462
-------------- -------------- --------------
Gross margin 28,092 -- 28,092
-------------- -------------- --------------
Operating expenses:
Research and development 207,503 -- 207,503
Selling, general and administrative 411,409 -- 411,409
-------------- -------------- --------------
Total operating expenses 618,912 -- 618,912
-------------- -------------- --------------
Operating loss (590,820) -- (590,820)
-------------- -------------- --------------
Other income (expense):
Interest expense (15,249) -- (15,249)
Other income 12,389 -- 12,389
Fair value of penalty common stock -- (86,365) (86,365)
-------------- -------------- --------------
Total other income (expense) (2,860) (86,365) (89,225)
-------------- -------------- --------------
Net loss $ (593,680) $ (86,365) $ (680,045)
-------------- -------------- --------------
Weighted average number of shares
outstanding 19,132,084 19,132,084 19,132,084
============== ============== ==============
Net loss per share - basic and diluted $ (0.03) $ 0.00 $ (0.04)
============== ============== ==============
-43-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Statement of Operations for the
Year Ended December 31, 2004
As
Previously Restatement
Reported Adjustment As Restated
12/31/04 12/31/04 12/31/04
-------------- -------------- --------------
Revenues:
Services $ 312,401 $ -- $ 312,401
Product -- -- --
-------------- -------------- --------------
Total revenues 312,401 -- 312,401
-------------- -------------- --------------
Cost of revenues:
Services 305,343 -- 305,343
Product -- -- --
-------------- -------------- --------------
Total cost of revenues 305,343 -- 305,343
-------------- -------------- --------------
Gross margin 7,058 -- 7,058
-------------- -------------- --------------
Operating expenses:
Research and development 712,467 -- 712,467
Selling, general and administrative 2,445,226 -- 2,445,226
-------------- -------------- --------------
Total operating expenses 3,157,693 -- 3,157,693
-------------- -------------- --------------
Operating loss (3,150,635) -- (3,150,635)
-------------- -------------- --------------
Other income (expense):
Interest expense and amortization
of debt discount (81,380) -- (81,380)
Foreign currency transaction loss (14,170) -- (14,170)
Other income 39,999 -- 39,999
Gain on fair value of warrants -- 23,305 23,305
Fair value of penalty common stock -- (173,481) (173,481)
-------------- -------------- --------------
Total other income (expense) (55,551) (150,176) (205,727)
-------------- -------------- --------------
Net loss $ (3,206,186) $ (150,176) $ (3,356,362)
-------------- -------------- --------------
Weighted average number of shares
outstanding 17,726,004 17,726,004 17,726,004
============== ============== ==============
Net loss per share - basic and diluted $ (0.18) $ (0.01) $ (0.19)
============== ============== ==============
-44-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Statement of Operations for the Three Months Ended
March 31, 2005 (unaudited)
As
Previously Restatement
Reported Adjustment As Restated
3/31/05 3/31/05 3/31/05
-------------- -------------- --------------
Revenues:
Services $ 229,780 $ -- $ 229,780
Product 5,000 -- 5,000
-------------- -------------- --------------
Total revenues 234,780 -- 234,780
-------------- -------------- --------------
Cost of revenues:
Services 99,042 -- 99,042
Product 5,696 -- 5,696
-------------- -------------- --------------
Total cost of revenues 104,738 -- 104,738
-------------- -------------- --------------
Gross margin 130,042 -- 130,042
-------------- -------------- --------------
Operating expenses:
Research and development 158,210 -- 158,210
Selling, general and administrative 378,936 -- 378,936
-------------- -------------- --------------
Total operating expenses 537,146 -- 537,146
-------------- -------------- --------------
Operating loss (407,104) -- (407,104)
-------------- -------------- --------------
Other income (expense):
Interest expense and amortization
of debt discount (86,032) -- (86,032)
Other income 53,177 -- 53,177
Gain on fair value of warrants -- 2,717 2,717
Fair value of penalty common stock -- (79,982) (79,982)
-------------- -------------- --------------
Total other income (expense) (32,855) (77,265) (110,120)
-------------- -------------- --------------
Net loss $ (439,959) $ (77,265) $ (517,224)
-------------- -------------- --------------
Weighted average number of shares
outstanding 19,161,930 19,161,930 19,161,930
============== ============== ==============
Net loss per share - basic and diluted $ (0.02) $ 0.00 $ (0.03)
============== ============== ==============
-45-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Statement of Operations for the Six Months Ended
June 30, 2005 (unaudited)
As
Previously Restatement
Reported Adjustment As Restated
6/30/05 6/30/05 6/30/05
-------------- -------------- --------------
Revenues:
Services $ 529,003 $ -- $ 529,003
Product 5,000 -- 5,000
-------------- -------------- --------------
Total revenues 534,003 -- 534,003
-------------- -------------- --------------
Cost of revenues:
Services 186,475 -- 186,475
Product 5,630 -- 5,630
-------------- -------------- --------------
Total cost of revenues 192,105 -- 192,105
-------------- -------------- --------------
Gross margin 341,898 -- 341,898
-------------- -------------- --------------
Operating expenses:
Research and development 297,877 -- 297,877
Selling, general and administrative 775,977 -- 775,977
-------------- -------------- --------------
Total operating expenses 1,073,854 -- 1,073,854
-------------- -------------- --------------
Operating loss (731,956) -- (731,956)
-------------- -------------- --------------
Other income (expense):
Interest expense and amortization
of debt discount (187,675) -- (187,675)
Other income 142,045 -- 142,045
Gain on fair value of warrants -- 2,717 2,717
Fair value of penalty common stock -- (79,982) (79,982)
-------------- -------------- --------------
Total other income (expense) (45,630) (77,265) (122,895)
-------------- -------------- --------------
Net loss $ (777,586) $ (77,265) $ (854,851)
-------------- -------------- --------------
Weighted average number of shares
outstanding 19,498,113 19,498,113 19,498,113
============== ============== ==============
Net loss per share - basic and diluted $ (0.04) $ 0.00 $ (0.04)
============== ============== ==============
-46-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restated Consolidated Statement of Operations for the Nine Months Ended
September 30, 2005 (unaudited)
As
Previously Restatement
Reported Adjustment As Restated
9/30/05 9/30/05 9/30/05
-------------- -------------- --------------
Revenues:
Services $ 910,487 $ -- $ 910,487
Product 21,930 -- 21,930
-------------- -------------- --------------
Total revenues 932,417 -- 932,417
-------------- -------------- --------------
Cost of revenues:
Services 390,673 -- 390,673
Product 18,423 -- 18,423
-------------- -------------- --------------
Total cost of revenues 409,096 -- 409,096
-------------- -------------- --------------
Gross margin 523,321 -- 523,321
-------------- -------------- --------------
Operating expenses:
Research and development 353,466 -- 353,466
Selling, general and administrative 1,128,357 -- 1,128,357
-------------- -------------- --------------
Total operating expenses 1,481,823 -- 1,481,823
-------------- -------------- --------------
Operating loss (958,502) -- (958,502)
-------------- -------------- --------------
Other income (expense):
Interest expense and amortization
of debt discount (288,063) -- (288,063)
Other income 156,116 -- 156,116
Gain on fair value of warrants -- 2,717 2,717
Fair value of penalty common stock -- (79,982) (79,982)
-------------- -------------- --------------
Total other income (expense) (131,947) (77,265) (209,212)
-------------- -------------- --------------
Net loss $ (1,090,449) $ (77,265) $ (1,167,714)
-------------- -------------- --------------
Weighted average number of shares
outstanding 19,610,161 19,610,161 19,610,161
============== ============== ==============
Net loss per share - basic and diluted $ (0.06) $ 0.00 $ (0.06)
============== ============== ==============
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - EQUIPMENT AND FURNISHINGS
The components of equipment and furnishings are set forth below:
Estimated
Useful
Lives
------------
Equipment 3 Years $ 386,949
Furniture and fixtures 3 Years 15,769
Improvements Life of 47,765
lease ------------
450,483
Less: Accumulated depreciation (317,858)
------------
Total $ 132,625
============
Depreciation expense was $73,325 and $91,927 for the years ended December 31,
2005 and 2004, respectively.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of the following:
Gross December 31, 2005
Carrying Accumulated
Amount Amortization Net
-------- ----------------- --------
Amortizable intangible assets
Intellectual Property $313,500 $ 31,350 $282,150
======== ================= ========
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 graphics. Amortization expense recorded for the year
ended December 31, 2005 amounted to $31,350.
On February 15, 2006, Cantor paid the Company $500,000 in consideration for
certain assets, including the above intellectual property from Absolute (Note
13).
NOTE 6 - COMMITMENTS
Operating Leases
In February 2004, the Company entered into a non-cancelable real property lease
agreement for office space in Las Vegas, Nevada, commencing May 1, 2004. The
term of the lease is 65 months. Minimum lease payments are approximately $10,700
per month as of December 31, 2005, inclusive of common area maintenance charges.
The Company has an option to renew the lease at the end of its initial term for
an additional five-year period. Contingent rental provisions within the lease
agreement require the minimum lease payments to be increased in accordance with
the Consumer Price Index (the "CPI"), commencing with the thirteenth month of
the lease. Rent expense for the years ended December 31, 2005 and 2004 was
$185,428 and $155,846, respectively. This lease included an incentive for
payment of costs for tenant improvements of $47,765. This incentive has been
reflected as an addition to equipment and furnishings and amortized over the
term of the lease.
-48-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 16, 2005, the Company subleased (the "Sublease") its Las Vegas office to
a third party (the "Sublessee"). The Sublease is for a period of two years and
includes successive one-year renewable options. Under the terms of the Sublease,
the Sublessee is required to pay the full lease payment due under the terms of
the original lease agreement (the "Lease"). In addition, during the term of the
Sublease, the Company maintains the contractual responsibility for certain
infrastructure located at the Las Vegas office. At the conclusion of the
Sublease, and assuming the renewable options are not exercised, there will be 28
months remaining on the Lease. The aggregate annual rentals for this Sublease
for the succeeding calendar years are (i) $128,315 in calendar 2006; and (ii)
$64,157 in calendar 2007.
On June 16, 2005, we leased office and warehouse space at 6754 Spencer St., Las
Vegas, Nevada 89119. This sublease had a term of one year and a monthly lease
rate of $2,200. On February 1, 2006, we terminated the sublease and have no
outstanding obligations thereunder. We have relocated our U.S. offices to 16821
Escalon Dr., Encino, California 91436. We do not pay rent at this location.
The Company also maintains an office in North Sydney, Australia, at a monthly
rate of $13,000 Australian dollars (approx. US$10,250). This lease is subject to
an oral agreement which requires 6-months advance written notice prior to
vacating the premises. Notice to vacate was given on October 1, 2005.
The following table summarizes the Company's obligations with respect to real
property leases:
FY2006 FY2007 FY2008 FY2009 Total
Real Property Leases $189,815 $128,315 $128,315 $64,157 $510,602
The foregoing table reflects the expiration of the North Sydney lease on March
31, 2006.
Employment Agreements
In August 2003, the Company entered into employment agreements with Tibor N.
Vertes and Gregory L. Hrncir. The employment agreements with Messrs. Vertes and
Hrncir, who are directors and executive officers of the Company, were for four
years, all subject to earlier termination under certain circumstances. The
employment agreement for Mr. Vertes provides for an annual salary of $185,000,
which may be increased by the board of directors, and an annual cash bonus of
$35,000 to $100,000 if certain performance goals are met. Since September 1,
2004, Mr. Vertes has been paid a reduced annual salary of $130,000. The amounts
by which payments were reduced have been accrued by the Company from October 1,
2004 based on a revised annual salary of $180,000. The revised annual salary was
orally agreed to by the Company and Mr. Vertes. The employment agreement for Mr.
Hrncir provides for an annual salary of $175,000, which may be increased by the
board of directors, an allowance of $1,500 per month for health care and other
benefits, and an annual cash bonus of $35,000 to $100,000 if certain performance
goals are met. Since September 1, 2004, Mr. Hrncir has been paid a reduced
annual salary of $130,000. The amounts by which payments were reduced have been
accrued by the Company from October 1, 2004 based on a revised annual salary of
$180,000. The revised annual salary was orally agreed to by the Company and Mr.
Hrncir.
In September 2004, the Company entered into an employment agreement with Kevin
J. Burman, who is an officer of the Company, for one year, subject to earlier
termination under certain circumstances. The employment agreement for Mr. Burman
provides for an annual salary of 72,000 pounds sterling (approximately
$135,000), which may be increased by the board of directors, an annual cash
bonus of $35,000 to $100,000 if certain performance goals are met, and a
percentage of sales in the form of a commission. On October 1, 2004, Mr.
Burman's annual salary was revised to $180,000 in consideration for the
elimination of the sales commissions contemplated in Mr. Burman's employment
agreement. The revised annual salary, and elimination of the sales commission
provision, was orally agreed to by the Company and Mr. Burman. Since October 1,
2004, Mr. Burman has been paid at the reduced annual salary of $130,000. The
amounts by which payments were reduced have been accrued by the Company from
October 1, 2004 based on a revised annual salary of $180,000.
-49-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2005, accrued compensation related to these employees as a
result of the reduced payments totaled $220,539.
In March 2005, the Company entered into a consulting agreement with Peter
Bengtsson, the Chief Executive Officer of Absolute Game, Ltd. ("Absolute"). The
consulting agreement is effective for a period of two years and includes Mr.
Bengtsson and one additional game developer/graphic artist. Collectively, Mr.
Bengtsson and the third party are being paid $12,000 per month.
The following table summarizes the Company's obligations with respect to
outstanding employment agreements as of December 31, 2005:
2006 2007 Total
-----------------------------------
Employment Agreements $360,000 $210,000 $570,000
NOTE 7 - STOCKHOLDERS' EQUITY
Stock Option Plans:
On April 1, 2004, the Company adopted the 2004 Stock Option and Incentive Plan
(the "2004 Plan") under which nonstatutory options to purchase shares of common
stock may be granted to employees, directors, and consultants as selected by the
Board of Directors. Awards under the 2004 Plan may also be made in the form of
incentive stock options and shares of common stock. 3,500,000 shares have been
reserved for issuance under the 2004 Plan. Options are exercisable over a period
of time, not to exceed ten years, as designated by the Board of Directors. The
Board also agreed to integrate into the 2004 Plan all outstanding options that
had been granted under the 2003 Stock Option and Incentive Plan.
-50-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes option activity under the 2004 Plan during the
years ended December 31, 2005 and 2004:
2005 2004
----------------------------------- -----------------------------------
Number of Weighted-average Number of Weighted-average
Shares Exercise Price Shares Exercise Price
---------------------------------- ---------------- ---------------- ---------------- ----------------
Outstanding at beginning of year 2,508,442 $ 0.77 2,262,989 $ 0.75
Granted to employees 320,000 $ 0.39 531,582 $ 0.85
Granted to consultants -- -- 112,325 $ 0.87
Cancelled (905,274) $ 0.66 (398,454) $ 0.75
---------------------------------- ---------------- ---------------- ---------------- ----------------
Outstanding at end of year 1,923,168 $ 0.77 2,508,442 $ 0.78
================================== ================ ================ ================ ================
Options exercisable at year-end 1,906,168 $ 0.77 2,449,067 $ 0.77
================================== ================ ================ ================ ================
Weighted-average fair value of
options granted during the year $ 0.08 $ 0.21
================================== ================ ================ ================ ================
Previously, William McMaster, our former Chief Technology Officer, resigned due
to personal and family obligations. As a result of the foregoing, Mr. McMaster's
options to purchase a total of 500,000 shares of common stock have been
forfeited.
The following table summarizes information about stock options outstanding at
December 31, 2005:
Options Outstanding Options Exercisable
---------------------- ------------------------------- ----------- -----------------------------
Range of Exercise Number Weighted- Weighted Number Weighted
Prices Outstanding Average -average Exercisable -average
Remaining Exercise Exercise
Contractual Price Price
Life (years)
---------------------- ------------- ----------------- ----------- ------------- --------------
$0.20 - $1.00 1,917,843 6.03 $0.77 1,900,843 $ 0.77
$1.01 - $1.31 5,325 8.17 $1.13 5,325 $ 1.13
------------- -------------
1,923,168 1,906,168
============= =============
Warrants:
In January 2004, the Company issued warrants to purchase 100,000 shares of
common stock to consultants in exchange for services. Such warrants are
exercisable for two years commencing January 16, 2004, are fully vested and have
an exercise price of $0.75 per share. The Company recognized charges to selling,
general and administrative expenses for the year ended December 31, 2004, for
the fair value of the warrants issued, calculated using a Black-Scholes
option-pricing model, which amounted to $75,337.
In March 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 Company recognized
charges to additional paid-in capital in the year ended December 31, 2005, for
the fair value of the warrants issued, calculated using a Black-Scholes
option-pricing model, which amounted to $136,000.
-51-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes all of the Company's warrant activity during the
years ended December 31, 2005 and 2004:
Number of
Warrant Weighted-Average
Outstanding Exercise Price
---------------- ----------------
Outstanding at January 1, 2004 1,476,039 $ 1.50
Granted (A) 100,000 $ 0.75
Granted (B) 2,811,750 $ 1.50
Granted (C) 58,334 $ 1.50
Granted (D) 8,000,000 $ 0.60
Granted (E) 5,000,000 $ 0.40
Warrants forfeited (200,000) $ 1.50
---------------- ----------------
Outstanding at December 31, 2004 17,246,123 $ 0.76
2004
Granted (F) 500,000 $ 0.40
Warrants cancelled (3,779,373) $ 1.50
---------------- ----------------
Outstanding at December 31, 2005 13,966,750 $ 0.55
================ ================
(A) See description of warrants issued for services above .
(B) See description under "Stock Activity" below.
(C) See description under "Stock Activity" below.
(D) These warrants were issued in connection with the Investment Agreement
(see Note 8).
(E) These warrants were issued in connection with the Investment Agreement
(see Note 8).
(F) See description of warrants issued for services above.
Assumptions Used in Determining Fair Value of Stock Options and Warrants:
The fair value of stock options and warrants were estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:
2005 2004
---------- ----------
Expected volatility 66.16% 80.90%
Risk-free interest rate 3.97% 3.63%
Expected life (years) 1 to 10 1 to 10
Expected dividends 0% 0%
Stock Activity:
On May 31, 2004, the Company received proceeds of $2,143,242, net of expenses of
$301,758, from the sale of 244.5 units to investors at a price of $10,000 per
unit through a private placement. Each unit consisted of 10,000 shares of common
stock and a warrant to purchase 10,000 shares of common stock at $1.50 per
share. The warrants expired on May 31, 2005.
On May 31, 2004, the Company issued warrants to purchase a total of 366,750
shares of common stock in exchange for investment banking consulting services in
connection with its private placement of units to investors at a price of
$10,000 per unit, consisting of 10,000 shares of common stock and a warrant to
purchase 10,000 shares of common stock. Such warrants are exercisable for two
years commencing May 31, 2005, are fully vested and have an exercise price of
$1.50 per share.
-52-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 31, 2004, the Company issued 5.83 units with a fair value of $58,334 in
exchange for equipment. Each unit consisted of 10,000 shares of common stock and
a warrant to purchase 10,000 shares of common stock at $1.50 per share. The
warrants expired on May 31, 2005.
During the year ended December 31, 2004, the Company issued 507,390 shares of
common stock with a fair value of $485,315 to consultants for strategic
advisory, investment banking and research services. The Company recognized a
charge to selling, general and administrative expenses during the ended December
31, 2004 of $485,315.
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 on such date, in
exchange for the purchase of intangible assets from Absolute (see Note 5).
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, which expired on May 31, 2005.
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 8 - 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. At the time of issuance, the Board
of Directors has the right to designate the rights, preferences and privileges
of each class. As of December 31, 2005, the Company did not have any shares of
preferred stock outstanding.
NOTE 9 - RELATED PARTY TRANSACTIONS
On September 6, 2004, the Company entered into promissory notes payable totaling
$212,848 with Tibor N. Vertes, our Chief Executive Officer and Chairman, and
Gregory L. Hrncir, our President and a Director, for accrued salary and
consulting services rendered, respectively. Repayment of the notes commenced on
October 1, 2004 and were required to continue until maturity on December 1,
2005. The notes were non-interest bearing and had a balance of $55,548 at
December 31, 2005. Default occurred in September 2005 and the principal amount
of the notes was increased to reflect $21,285, being accrued interest of 10% per
annum from August 1, 2003 to September 6, 2004 on the notes, collectively.
On September 30, 2004, Tibor Vertes, our Chief Executive Officer and Chairman,
loaned the Company $42,852. The loan was repaid in October 2004.
-53-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SENIOR SECURED NOTE PAYABLE
On September 2, 2004, the Company entered into a Senior Secured Bridge Note (the
"Bridge Note") in the amount of $750,000 with GEG Holdings, LLC, a Delaware
limited liability company ("GEG Holdings"), an affiliate of Cantor G&W (Nevada),
L.P., a Nevada limited partnership ("Cantor"). The Bridge Note matures on August
30, 2009.
The terms of the Bridge Note provide for the funding to occur in three tranches.
The first funding of $250,000 occurred on September 2, 2004. The second and
third tranches, each in the amount of $250,000, were funded on October 1 and
November 1, 2004. The Bridge Note was secured by a perfected first priority
security interest in all of the intellectual property assets of the Company. No
principal amount of this note may be repaid, in whole or in part, prior to
maturity, without the express written approval of GEG Holdings at its sole
discretion.
The outstanding principal amount of the Bridge Note accrued interest at the
Federal Funds Effective Rate of Interest (4.00% as of December 31, 2005), in
effect from time to time, plus 6% per annum and accrued semi-annually, in
arrears, on December 1, 2004 and on each June 1 and December 1 thereafter. The
Bridge Note did not require the Company to make cash interest payments until
maturity. Interest was to be payable in cash only at maturity or, at the option
of GEG Holdings, (A) by the issuance on each Interest Payment Date of an
immediately exercisable five year warrant (an "Interest Warrant") to purchase
shares of common stock at an exercise price per share of the lesser of (i) the
average of the closing market price of the Company's common stock, for the 30
days prior to the applicable Interest Payment Date, but in any event not less
than $0.40 per share, and (ii) $0.54 per share. Each Interest Warrant will
reflect the number of shares of common stock equal to the interest payment then
due, rounded up to the nearest share; or (B) by the issuance on any subsequent
Interest Payment Date of an Interest Warrant, on the then fully accrued amount.
On December 8, 2004, the Company entered into a Loan Facility and Investment
Agreement (the "Investment Agreement") with Cantor, pursuant to which, as more
fully described below, Cantor agreed to provide up to an additional $1,250,000
(the "Additional Amount") in senior secured debt financing to the Company, in
exchange for, among other things, the right to acquire control of the Company
upon the conversion and exercise of various securities that Cantor and its
affiliates received from the Company and certain stockholders upon entering into
the Investment Agreement. Immediately prior to the execution and delivery of the
Investment Agreement, GEG Holdings assigned to Cantor, and Cantor assumed from
GEG Holdings, all of GEG Holdings' rights and obligations with respect to the
Bridge Financing (the "Assignment and Assumption Agreement"). Consequently, the
Investment Agreement relates to an aggregate of $2,000,000 (the "Loan Amount")
of senior secured financing.
Pursuant to the Investment Agreement, Cantor loaned the Additional Amount to the
Company in four installments, subject in each instance to the satisfaction of
customary closing conditions: (i) $250,000 upon the execution of the Investment
Agreement; (ii) $500,000 on December 31, 2004; (iii) $250,000 on March 31, 2005;
and (iv) $250,000 on June 30, 2005. The Loan Amount is evidenced by a five year
senior secured promissory note (the "Note") which bears interest at the federal
funds rate of interest in effect from time to time, plus 6% per annum. The Note
matures on December 9, 2009. Interest accrues semi-annually, in arrears, on
December 1 and June 1 of each year during the term of the Note (each, an
"Interest Payment Date"). The Note does not require the Company to make cash
interest payments until maturity, and the Loan Amount is secured by a perfected,
first priority security interest in all of the intellectual property assets of
the Company. Cantor's first priority security interest in the intellectual
property is evidenced by a security agreement that was executed and delivered
upon the entering into of the Bridge Financing (the "Security Agreement"), which
was assigned to Cantor pursuant to the Assignment and Assumption Agreement.
-54-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the term of the Investment Agreement, which extends for as long as Cantor
holds any debt or equity securities that it acquired from the Company pursuant
to the Investment Agreement, Cantor has various rights with respect to the
Company. Specifically, during the term of the Investment Agreement, among other
things: (i) Cantor has the right to board representation in the form of two
board seats or two board observers (or a combination of the two); (ii) Cantor
has the right to receive, on a periodic basis and upon request, various
financial and other information from the Company; (iii) Cantor has pre-emptive
rights with respect to the issuance of any additional equity securities; (iv)
Cantor has "demand" and "piggyback" registration rights with respect to the
equity securities of the Company owned by Cantor however acquired, either
pursuant to the Investment Agreement or otherwise; and (v) without the
affirmative prior written consent of Cantor, the Company may not, among other
things, (a) issue any additional equity securities, (b) incur any additional
indebtedness, (c) effect a change in control, (d) amend or modify the Company's
by-laws or articles of incorporation, (e) modify or enter into new employment
agreements with any executive officer of the Company, or (f) license any of its
intellectual property. In addition, Cantor has the right to cause the Company to
reincorporate in the State of Delaware (the "Reincorporation").
As noted above, in connection with entering into the Investment Agreement,
Cantor received the right to acquire control of the Company pursuant to various
equity instruments that it received from the Company and certain stockholders
simultaneously with the entering into of the Investment Agreement. Specifically,
the Company issued to Cantor a five year stock purchase warrant (the "Equity
Warrant"), immediately exercisable in whole or in part, for up to at least
8,000,000 shares of the Company's common stock, at an initial per share exercise
price of $0.60, subject to adjustment. The Equity Warrant also has anti-dilution
protection that provides that Cantor shall always be entitled to acquire a fixed
percentage of the Company's issued and outstanding common stock on a fully
diluted basis exclusive of the Equity Warrant and "Debt Warrant" (as defined
below) issued to Cantor.
Cantor also received a stock purchase warrant relative to the Loan Amount (the
"Debt Warrant"), which is immediately exercisable in whole or in part by Cantor,
at its election, either for cash, or by converting all or a portion of the then
outstanding principal amount of the Note into shares of common stock. The
initial per share exercise price of the Debt Warrant, subject to adjustment, is
equal to the lesser of (i) the average of the closing market price of the common
stock for the 30 days prior to the applicable exercise date, but in no event
less than $0.40 per share, and (ii) $0.54 per share. The Debt Warrant also has
anti-dilution protection such that at all times it is exercisable into no less
than a fixed percentage of the Company's issued and outstanding common stock on
a fully diluted basis exclusive of the Equity Warrant and the Debt Warrant
issued to Cantor. In the event and to the extent Cantor exercises the Debt
Warrant with cash, the Loan Amount evidenced by the Note will remain a
continuing liability of the Company.
As noted above, interest on the Note is payable in cash only at maturity. Prior
to the maturity, however, Cantor has the right to convert the accrued interest
on the Note into shares of common stock pursuant to one or more interest
warrants (each an "Interest Warrant") at a price per share equal to the lesser
of (a) the average of the closing market price of the common stock for the 30
days prior to the applicable Interest Payment Date, but in any event not less
than $0.40 per share, and (b) $0.54 per share, rounded up to the nearest share.
Simultaneously upon entering into the Investment Agreement, Cantor also entered
into an Option Agreement and Irrevocable Proxy (the "Option Agreement") with
various parties, including the executive officers and directors of the Company
(all such parties, collectively, the "Optionors"). Under the terms of the Option
Agreement, Cantor has an irrevocable option (the "Option") to purchase up to
7,500,000 shares of common stock (the "Option Shares") beneficially owned by the
Optionees on the following terms: (A) upon the execution of the Option Agreement
until December 31, 2005, up to 7,500,000 Option Shares, at an exercise price of
$0.60 per share; (B) from January 1, 2006 until December 31, 2006, the balance
of the 7,500,000 Option Shares not purchased prior to this period, not to exceed
5,000,000 Option Shares, at an exercise price of $0.80 per share; and (C) from
January 1, 2007 until December 31, 2007, the balance of the 7,500,000 Option
Shares not purchased prior to this period, not to exceed 2,500,000 Option
-55-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares, at an exercise price of $1.00 per share; provided, however, that Cantor
shall not have the right to exercise the Option to acquire more than 54% of the
common stock of the Company. The Optionors also granted Cantor a right of first
refusal with respect to any proposed sale by an Optionor of their Option Shares.
Upon the execution of the Option Agreement, the Optionors agreed to vote all of
their shares of common stock, including but not limited to their Option Shares,
in favor of any Cantor nominee to the Board of Directors. Finally, the Optionors
have granted Cantor an irrevocable proxy with respect to all of their shares of
common stock, including their Option Shares, which shall only be effective upon
Cantor's acquisition of beneficial ownership of at least 11,700,000 shares of
the Company's common stock.
Simultaneously upon the entering into of the Investment Agreement, Cantor and
the Company, and the Company's wholly owned subsidiary, Gaming & Entertainment
Technology Pty Ltd. ("GET"), also entered into an Amended and Restated Software
Development and License Agreement (the "Software Agreement") which amends and
supersedes that certain Software Development and License Agreement that the
Company and GET entered into with GEG Holdings in connection with the Bridge
Financing, and which was assumed by and assigned to Cantor pursuant to the
Assignment and Assumption Agreement. The Software Agreement provides for
royalties and development revenues to be paid by Cantor to the Company, and
requires that the Company develop for and license to Cantor, on an exclusive
basis throughout the world (subject only to a pre-existing license previously
granted by the Company and GET to a third party), the Company's proprietary
gaming software for use in connection with the Internet and/or any other
technology, whether now existing or hereafter devised, using a computer or
similar device. The Company was engaged in software development for Cantor
pursuant to the Software Agreement as of December 31, 2005.
The Company's proprietary software which is the subject of the Software
Agreement has been delivered into escrow with an unaffiliated third party
pursuant to an escrow agreement. (the "Escrow Agreement") and Cantor has access
to such escrowed software under various circumstances.
The Company received total proceeds of $500,000 and $1,500,000 from the Bridge
Note in 2005 and 2004, respectively, and recorded an aggregate discount of
$1,110,340 for the fair value of the 13,000,000 warrants issued in connection
with the Bridge Note. This discount is amortized over the period of the related
debt using the straight-line method. Amortization of the discount, which is
included in interest expense, amounted to $222,068 and $18,865 for the years
ended December 31, 2005 and 2004, respectively.
NOTE 11 - 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
years ended December 31, 2005 and 2004:
December 31, 2005
Revenues from
external Long-lived
Geographical area customers assets
------------- ------------
United States $ 7,296 $ 88,892
United Kingdom 37,380 4,258
Australia 1,230,143 39,475
------------- ------------
$ 1,274,819 $ 132,625
============= ============
-56-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Revenues from
external Long-lived
Geographical area customers assets
------------- ------------
U
United States -- $ 88,543
United Kingdom -- $ 2,415
Australia $ 312,401 $ 23,857
------------- ------------
$ 312,401 $ 114,815
============= ============
NOTE 12 - INCOME TAXES
At December 31, 2005, the Company had available for U.S. federal and state
income tax purposes, net operating loss carryforwards of approximately
$1,400,000 that expire through 2025 and foreign loss carryforwards of
approximately $1,700,000. The Company had no other significant temporary
differences as of that date. Due to the uncertainties related to, among other
things, the changes in the ownership of the Company, which could subject those
loss carryforwards to substantial annual limitations, and the extent and timing
of its future taxable income, management does not consider the realization of
the deferred tax assets attributable to the potential benefits of approximately
$1,700,000 from the utilization of those net operating loss carryforwards to be
more likely than not and, accordingly, the Company offset the deferred tax
assets by an equivalent valuation allowance as of December 31, 2005.
The Company had also offset the potential benefits from net operating loss
carryforwards by equivalent valuation allowances as of December 31, 2005 and
2004. As a result of decreases and increases in the valuation allowance of
approximately $500,000 and $800,000 in 2005 and 2004, respectively, the Company
did not recognize any credits for income taxes in the accompanying consolidated
statements of operations to offset its pre-tax losses in those years.
NOTE 13 - SUBSEQUENT EVENTS
On February 15, 2006, Gaming & Entertainment Group, Inc. and its
wholly-owned subsidiary Gaming & Entertainment Technology Pty Limited entered
into an Asset Purchase Agreement (the "Cantor Asset Purchase Agreement") with
Cantor.
Pursuant to the terms of the Cantor Asset Purchase Agreement, Cantor paid
the Company $500,000 in consideration for certain assets, including (i) the
source and object code relating to the software previously licensed by Cantor
pursuant to the License Agreement, including all intellectual property rights
thereto, and all related documentation, (ii) all graphics relating to the source
code for all Internet casino developed previously by the Company, excluding
certain graphics owned by third parties and (iii) various hardware consisting of
computer servers, personal computers and other computer equipment.
-57-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The terms of the Cantor Asset Purchase Agreement also includes (I) the
termination of the License Agreement between the Company and Cantor, (II) the
termination of the Investment Agreement between the Company and Cantor, (III) an
amendment to the Note issued in favor of Cantor which provides for the
following: (a) for the forgiveness, on an annual basis during the period the
Note remains outstanding, of outstanding principal and accrued interest under
the Note in an amount equal to the royalties that would have been payable to the
Company relating to the Cantor Casino and all future "white-label" Internet
casino clients of Cantor had the License Agreement not been terminated; (b) an
amendment to paragraph 5(b) of the Note relating to a "change of control" of the
Company so that Cantor may only require immediate repayment of the Note in the
event a "person" or "group" (as such terms are used in Section 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) becomes the beneficial
owner, directly or indirectly, of 51% of the voting common stock of the Company
(i) through acquisition of common stock of the Company, (ii) as a result of a
merger or consolidation involving the Company, or (iii) as a result of the sale
of all or substantially all of the assets of the Company, and (c) allows for
prepayments of the outstanding principal and accrued interest under the Note,
(IV) an amendment to the Security Agreement between the Company and Cantor which
provides that Cantor's security interest in the assets of the Company shall be
subordinated with respect to any collateral acquired by the Company with the
proceeds of any future debt or equity issuances, (V) an amendment to the Equity
Warrant to reduce the number of shares exercisable thereunder, at a price of
$0.60 per share, from 8,000,000 shares to 2,000,000 shares, and (VI) the
termination of the Option Agreement.
In conjunction with the Cantor Asset Purchase Agreement, all further
obligations of the Company, pursuant to the Absolute Asset Purchase Agreement
have been terminated, including the cancellation of the remaining $100,000 due
Absolute thereunder. In addition, the consulting agreement with Peter Bengtsson
has been terminated, which includes the cancellation of $156,000 in consulting
fees under such agreement.
On February 15, 2006, Kevin J. Burman, Chief Operating Officer of the
Company and a director of each of its wholly-owned subsidiaries, resigned from
all of the above positions. Mr. Burman accepted employment with Cantor as its
Chief Development Officer. The foregoing was mutually agreed upon by Mr. Burman,
the Company and Cantor. Mr. Burman's resignation did not involve any
disagreement with the Company, its officers or directors.
On February 27, 2006, the Company paid off the note payable in favor of
Mr. Vertes, relating to accrued salary through September 2004, and the note
payable in favor of Mr. Hrncir, relating to consulting services provided during
the period from May 1999 to August 2003. Mr. Vertes and Mr. Hrncir serve as our
Chief Executive Officer and President, respectively.
-58-
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS
We evaluated the effectiveness of our disclosure controls and procedures
as of December 31, 2005, the end of the fiscal period covered by this Annual
Report on Form 10-KSB. This evaluation was made under the supervision of our
principal executive officer and principal financial officer, and in conjunction
with our accounting personnel.
We reviewed and evaluated the effectiveness of the design and operation of
our disclosure controls and procedures, as of the end of the fiscal year covered
by this report, as required by Securities Exchange Act Rule 13a-15, and
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in our reports filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended, is accumulated and communicated to management on a timely
basis, including our principal executive officer and principal financial
officer.
Based on this evaluation, our principal executive officer and principal
financial officer concluded that, as of the end of such period, our disclosure
controls and procedures are effective to ensure that we record, process,
summarize, and report information required to be disclosed in the reports we
filed under the Securities Exchange Act of 1934 within the time periods
specified by the Securities and Exchange Commission's rules and regulations.
During the year ended December 31, 2005, there have been no changes in our
internal control over financial reporting, or to our knowledge, in other
factors, that have materially affected or are reasonably likely to materially
affect our internal controls over financial reporting.
-59-
PART II
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following information is furnished with respect to each member of our
board of directors, our executive officers who are not directors, and our key
employees. There are no family relationships between or among any of our
directors or executive officers. Each of our executive officers is an employee
of Gaming & Entertainment Group, Inc. and serves at the discretion of our board.
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
------------------ --- -----------------------------------------------------
Tibor N. Vertes 57 Chief Executive Officer and Chairman of the Board
Gregory L. Hrncir 39 President, Secretary and a Director
Jay Sanet 56 Director
Set forth below is a description of the background of each of our
executive officers and directors:
Tibor N. Vertes, 57, serves as our Chief Executive Officer and Chairman of
the Board of Directors. Mr. Vertes was a practicing attorney from 1972 to 1989,
at which time he retired as the senior partner of the Yellands law firm,
Melbourne, Australia. During his legal career, Mr. Vertes specialized in
financial services having represented many financial institutions. Thereafter,
Mr. Vertes worked as an international business consultant in Hong Kong,
specializing in financial services and telecommunications related matters.
Commencing in 1995, Mr. Vertes became an officer of Ezi Phonecard Pty Ltd., a
leading pre-paid telecommunications entity and was instrumental in reorganizing
its capital and business structure before its sale to RSL Com, a global
telecommunications concern based in New York. Upon the sale of Ezi Phonecard,
Mr. Vertes founded Gaming & Entertainment Group, Inc. Mr. Vertes is admitted to
practice as a Barrister and Solicitor of the High Court of Australia, and
Supreme Court of NSW and Victoria. Mr. Vertes presently serves as Chairman of
Capital First Group (mortgage banking and financial services). Mr. Vertes
received a Bachelor of Laws from Sydney University Law School.
Gregory L. Hrncir, 39, has served as our President, Secretary and a
Director since 2003, and has been involved with us in a consultancy capacity
since 1996. From 2000 to 2003, Mr. Hrncir served as an officer of eRoomSystem
Technologies, Inc., a provider of proprietary software and hardware products to
the hospitality industry. In 1999, Mr. Hrncir served as an officer of PayStation
America, Inc., an e-commerce company that provided a proprietary automated bill
payment solution in the United States prior to its sale. In 1994, Mr. Hrncir
commenced his professional career in private legal practice in Los Angeles,
California, specializing in corporate and securities matters representing
issuers and investment banks in a variety of transactions. Mr. Hrncir serves on
the Board of Directors of Pacific Payment Systems, Inc., a privately held
company that is the successor to PayStation. Mr. Hrncir received a Bachelor of
Science from Arizona State University and a Juris Doctor from Whittier Law
School. Mr. Hrncir is a member of the Arizona and California State Bars and a
member of numerous philanthropic and industry associations.
Jay Sanet, 55, has served as a Director since 2004 and as a Director of
NorStar Group, Inc. during the period 1998 through 2003. From 2002 to January
2004, Mr. Sanet served as Chief Executive Officer, President and Chairman of the
Board of Directors of NorStar. Mr. Sanet worked in the securities industry for
more than 25 years in various executive positions. Mr. Sanet received a
bachelor's degree in finance from the New York Institute of Finance.
-60-
KEY EMPLOYEES
Simon Daniel, 32, serves as our Chief Technology Officer. Mr. Daniel
oversees all software and hardware development for the Company. Previously, Mr.
Daniel worked as a java developer with Sony Europe and Compaq. Mr. Daniel
received a Bachelor of Science in Mathematics from the University of Auckland.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board has no authorized standing committees, but we anticipate forming
an audit committee, compensation committee and nominating committee this year.
In the interim, audit and compensation matters are reviewed by all of our board
members.
BOARD OF DIRECTORS MEETINGS
We had four board meetings during the fiscal year ended December 31, 2005.
All of the directors attended each of such meetings. The remaining matters were
approved by the board of directors via unanimous written consent.
DIRECTOR COMPENSATION
Our non-employee directors receive an attendance fee of $500 per board
meeting attended. In addition, non-employee directors receive an annual stock
option grant to purchase 25,000 shares of our common stock. Employee directors
do not receive additional compensation for serving as a board member.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our reporting directors and
executive officers, and persons who own more than ten percent of a registered
class of our equity securities, to file initial reports of ownership and reports
of changes in ownership of common stock and other equity securities of the
Company with the Securities and Exchange Commission, or the Commission.
Officers, directors and stockholders holding more than 10% of the class of stock
are required to furnish us with copies of all Section 16(a) forms they file with
the Commission.
To our knowledge, based solely on review of the copies of such reports
furnished to us and written representations that no other reports were required,
during the fiscal year ended December 31, 2004, all reports required under
Section 16(a) were filed as required with the Commission.
CODE OF ETHICS
We are still in the process of evaluating the code of ethics requirements
of Item 406 of Regulation S-B of the Exchange Act, our existing policies and
procedures, applicable regulatory requirements and the various elements that
such code should contain given the diverse nature of our company. We anticipate
adopting a code of ethics that meets the requirements of Item 406 of Regulation
S-B on or before the date of our 2006 Annual Meeting of Stockholders. Once
adopted, we will file a copy of our code of ethics with the Commission. In
addition, we intend to disclose any amendment to such code or any waivers
granted to our executive officers or directors under such code of ethics through
the filing of a current report on Form 8-K with the Commission within five
business days following the date of any such amendment or waiver, if applicable.
-61-
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation awarded to, earned by or
paid to, our chief executive officer, our president and secretary, our chief
operating officer and our sole non-employee director during the fiscal years
ended 2005, 2004 and 2003.
Long-Term
Compensation
(Stock/ All Other
Annual Compensation Options) Compensation
Name and ----------------------------- --------------------------
Principal Position Year Salary($) Bonus($)
-------- --------- -------- ------------ ------------
Tibor N. Vertes, 2005 86,667 0 0 42,400
Chief Executive 2004 179,167 0 0 0
Officer and 2003 97,874 0 955,214 0
Chairman(1)
Gregory L. Hrncir, 2005 92,083 0 0 72,000
President and 2004 172,500 0 0 104,125
Secretary(2) 2003 15,000 0 800,000 62,500
Kevin J Burman, 2005 130,000 0 0 0
Chief Operating 2004 121,565 0 200,000 0
Officer(3) 2003 108,485 0 0 0
Jay Sanet, 2005 0 0 0 0
Director(4) 2004 0 0 25,000 2,000
2003 0 0 120,912 0
-----------------------
1 Mr. Vertes serves as our Chief Executive Officer and Chairman. On
December 31, 2002, Mr. Vertes converted his accrued salary, in the amount of
$339,000 (relating to the period from our inception through such date), and
short-term loans, in the amount of $19,281, into 583,746 shares of common stock
and a warrant to purchase 477,707 shares of our common stock and is represented
in 2003 under long-term compensation. The conversion was made on terms identical
to the securities sold by us in the 2003 Offering. In August 2003, the Company
entered into an employment agreement with Mr. Vertes for four years and subject
to earlier termination under certain circumstances. The employment agreement for
Mr. Vertes provides for an annual salary of $185,000 and an annual cash bonus if
certain performance goals are met. Since September 2004, Mr. Vertes has been
paid at the rate of $130,000 per annum. The amounts by which payments were
reduced have been accrued by the Company from October 1, 2004 based upon a
revised annual salary of $180,000, which amount has been orally agreed to by the
Company and Mr. Vertes. Mr. Vertes deferred all salary payments during the
period September 1 through December 31, 2005. The accrued salary for this
period, in the amount of $43,333, was paid to Mr. Vertes in February 2006. Other
compensation for Mr. Vertes for fiscal year 2005 relates to accrued salary
outstanding from the period January 1, 2003 to September 1, 2004.
2 Mr. Hrncir serves as our President and Secretary. In 2003, we issued Mr.
Hrncir an option to purchase 800,000 shares of common stock at $0.75 per share.
In August 2003, the Company entered into an employment agreement with Mr. Hrncir
for four years and subject to earlier termination under certain circumstances.
The employment agreement for Mr. Hrncir provides for an annual salary of
$175,000, and an annual cash bonus if certain performance goals are met. Since
September 2004, Mr. Hrncir has been paid at the rate of $130,000 per annum. The
amounts by which payments were reduced have been accrued by the Company from
October 1, 2004 based upon a revised annual salary of $180,000, which amount has
been orally agreed to by the Company and Mr. Hrncir. Mr. Hrncir deferred all
salary payments during the period September 16 through December 31, 2005. The
accrued salary for this period, in the amount of $37,917, was paid to Mr. Hrncir
in February 2006. Other compensation for Mr. Hrncir for fiscal years 2003, 2004
and 2005 relates to payments for unpaid consulting services rendered during the
period 1999 through July 2003.
3 Mr. Burman served as our Chief Operating Officer until his resignation
on February 15, 2006 and concurrent hiring by Cantor as Chief Development
Officer. In September 2004, the Company entered into an employment agreement
with Mr. Burman for one year and subject to earlier termination under certain
circumstances. The employment agreement for Mr. Burman provides for an annual
salary of 72,000 pounds sterling (approx. $135,000), an annual cash bonus if
certain performance goals are met, and a commission in the form of a percentage
of sales and revenue sharing placements originated by Mr. Burman in the United
Kingdom. On October 1, 2004, Mr. Burman's annual salary was revised to $180,000
per annum in consideration for the elimination of the sales commissions
contemplated in Mr. Burman's employment agreement. The revised annual salary,
and elimination of the sales commission provision, was orally agreed to by the
Company and Mr. Burman. During the period October 1, 2004 through February 15,
2006, Mr. Burman has been paid at the reduced annual salary of $130,000. The
amounts by which payments were reduced have been accrued by the Company.
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4 Mr. Sanet serves as a Director and previously served as Chief Executive
Officer, President and Chairman of NorStar Group, Inc. In lieu of salary and
bonus, Mr. Sanet was issued 120,712 shares of common stock in 2003. In 2004, we
issued Mr. Sanet an option to purchase 25,000 and paid him $2,000 for consulting
services.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The table below sets forth the beneficial ownership of our common stock as
of March 20, 2006 by:
o All of our directors and executive officers, individually;
o All of our directors and executive officers, as a group; and
o All persons who beneficially own more than five percent of our
outstanding common stock.
The beneficial ownership of each person (other than Cantor G&W (Nevada),
L.P. as described in footnote six below) was calculated based on 19,830,602
shares of our common stock outstanding as of March 20, 2006, according to the
record ownership listings as of that date and the verifications we solicited and
received from each director, executive officer and five percent holder.
The Commission has defined "beneficial ownership" to mean more than
ownership in the usual sense. For example, a person has beneficial ownership of
a share not only if the person owns it in the usual sense, but also if he has
the power to vote, sell or otherwise dispose of the share. Beneficial ownership
also includes the number of shares that a person has the right to acquire within
60 days of March 20, 2006 pursuant to the exercise of options or warrants or the
conversion of notes, debentures or other indebtedness, but excludes stock
appreciation rights. Two or more persons might count as beneficial owners of the
same share. Unless otherwise noted, the address of the following persons listed
below is c/o Gaming & Entertainment Group, Inc., 16821 Escalon Dr., Encino,
California 91436.
NAME OF DIRECTOR OR EXECUTIVE OFFICER NUMBER OF SHARES PERCENTAGE
-------------------------------------------- ---------------- ---------------
Tibor N. Vertes(1) 6,658,183 24.1%
Gregory L. Hrncir(2) 2,388,567 8.6%
Jay Sanet(3) 27,012 0.1%
Directors and executive officers as a 9,073,762 32.8%
group (4 persons)(4)
NAME OF FIVE PERCENT HOLDERS NUMBER OF SHARES PERCENTAGE
-------------------------------------------- ---------------- ---------------
Cantor G&W (Nevada), L.P.(5) 7,948,966 28.7%
----------------------------
1 The shares of common stock beneficially owned by Tibor N. Vertes, our
Chief Executive Officer and Chairman, include 6,658,183 shares held by the
Vertes Family Trust.
2 The shares of common stock beneficially owned by Gregory L. Hrncir, our
President, Secretary and a Director, include 1,588,567 shares held by the Hrncir
Family Trust and options to purchase 800,000 shares of common stock, exercisable
at $0.75 per share, held by the Hrncir Family Trust.
3 The shares beneficially owned by Jay Sanet, a director, include 2,012
shares of common stock issued to Mr. Sanet directly, and options to purchase
25,000 shares of common stock, exercisable at $0.75 per share, held by Mr.
Sanet.
4 Represents the collective beneficial ownership of our common stock by
Tibor N. Vertes, Gregory L. Hrncir and Jay Sanet.
5 The shares of common stock beneficially owned by Cantor include 948,966
shares purchased in a non-open market transaction in 2004, a warrant to purchase
2,000,000 shares of common stock, exercisable at $0.60 per share through
December 9, 2009, and a warrant to purchase up to $2,000,000 of common stock of
the Company, exercisable at not less than $0.40 per share and not more than
$0.54 per share through December 9, 2009. The percentage ownership of Cantor set
forth above assumes (i) the full exercise of the warrant to purchase 2,000,000
shares, and (ii) that the warrant to purchase $2,000,000 of our common stock is
exercised at $0.40 per share, resulting in the issuance of 5,000,000 shares. The
registered business address for Cantor is 110 East 59th Street, New York, NY
10022.
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EQUITY COMPENSATION PLAN INFORMATION
2004 STOCK OPTION AND INCENTIVE PLAN
The 2004 Stock Option and Incentive Plan, or the Plan, was adopted by our
board on April 1, 2004 and approved by our stockholders on June 14, 2004. The
Plan provides us with the vehicle to grant to employees, officers, directors and
consultants stock options and bonuses in the form of stock and options. Under
the Plan, we can grant awards for the purchase of up to 3,500,000 shares of
common stock in the aggregate, including "incentive stock options" within the
meaning of Section 422 of the United States Internal Revenue Code of 1986 and
non-qualified stock options. As of March 20, 2006, we have options outstanding
to purchase 1,906,168 shares of our common stock under the Plan.
Our board of directors currently determines the persons to whom awards
will be granted, the nature of the awards, the number of shares to be covered by
each grant, the terms of the grant and with respect to options, whether the
options granted are intended to be incentive stock options, the duration and
rate of exercise of each option, the option price per share, the manner of
exercise and the time, manner and form of payment upon exercise of an option. We
anticipate forming a compensation committee, comprised of a majority of
non-employee directors, to oversee administration of the Plan.
OPTION GRANTS IN 2004
On October 21, 2005, we issued one of our employees an option to purchase
20,000 shares of common stock at $0.20 per share. The option is exercisable for
a period of ten years and vests at the rate of 1,000 shares per month. This
employee resigned effective February 15, 2006, at which time 3,000 of the shares
of common stock underlying the option had vested. We did not grant stock options
to our executive officers in fiscal year 2005.
EMPLOYMENT AGREEMENTS
In August 2003, the Company entered into employment agreements with Tibor
N. Vertes, and Gregory L. Hrncir, our Chief Executive Officer and President,
respectively. The employment agreements with Messrs. Vertes and Hrncir are for
four years and subject to earlier termination under certain circumstances.
The employment agreement for Mr. Vertes provides for an annual salary of
$185,000, which may be increased by the board of directors, and an annual cash
bonus of $35,000 to $100,000 if certain performance goals are met. Since
September 1, 2004, Mr. Vertes has been paid a reduced annual salary of $130,000.
The amounts by which payments were reduced have been accrued by the company from
October 1, 2004 based on a revised annual salary of $180,000. The revised annual
salary was orally agreed to by the Company and Mr. Vertes.
The employment agreement for Mr. Hrncir provides for an annual salary of
$175,000, which may be increased by the board of directors, an allowance of
$1,500 per month for health care and other benefits, and an annual cash bonus of
$35,000 to $100,000 if certain performance goals are met. Since September 1,
2004, Mr. Hrncir has been paid a reduced annual salary of $130,000. The amounts
by which payments were reduced have been accrued by the company from October 1,
2004 based on a revised annual salary of $180,000. The revised annual salary was
orally agreed to by the Company and Mr. Hrncir.
-64-
In September 2004, the Company entered into an employment agreement with
Kevin J. Burman, who is an officer of the Company, for one year, subject to
earlier termination under certain circumstances. The employment agreement for
Mr. Burman provides for an annual salary of 72,000 pounds sterling
(approximately $135,000), which may be increased by the board of directors, an
annual cash bonus of $35,000 to $100,000 if certain performance goals are met,
and a percentage of sales in the form of a commission. On October 1, 2004, Mr.
Burman's annual salary was revised to $180,000 in consideration for the
elimination of the sales commissions contemplated in Mr. Burman's employment
agreement. The revised annual salary, and elimination of the sales commission
provision, was orally agreed to by the Company and Mr. Burman. Since October 1,
2004, Mr. Burman has been paid at the reduced annual salary of $130,000. The
amounts by which payments were reduced have been accrued by the Company. Mr.
Burman resigned as our Chief Operating Officer on February 15, 2006.
The employment agreements with Messrs. Vertes and Hrncir contain
provisions relating to confidentiality, non-competition and non-solicitation of
employees during employment and for a period following termination. In addition,
the employment agreements provide for the assignment of all rights to personal
inventions during employment and for a period following termination. We have the
right to terminate the employment of Messrs. Vertes and Hrncir with cause or in
the event of permanent disability. We also have the right to terminate the
employment of Messrs. Vertes and Hrncir without cause. "Cause" is defined as
substantial failure to perform duties, willful misconduct injurious to the
company, conviction of a felony or breach of certain confidentiality,
non-competition or non-solicitation provisions. "Permanent Disability" is
defined as failure to perform his duties for 90 days due to physical or mental
illness. If the employment of Messrs. Vertes or Hrncir is terminated for any
reason other than death, permanent disability or cause, we must continue to pay
the greater of the base salary for the previous calendar year or the remaining
base salary payable over the remaining term of the employment agreement.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding grants of stock
options during the fiscal year ended December 31, 2005 made to our executive
officers.
Individual Grants
Percent of
Number of Total
Securities Options/Sirs
Underlying Granted to Exercise or
Options/Sirs Employees in Base Price Expiration
Name Granted Fiscal Year ($/Share) Date
------------ ------------ ------------ ------------
Tibor N. Vertes 0 0.0% N/A N/A
Gregory L. Hrncir 0 0.0% N/A N/A
Kevin J. Burman 0 0.0% N/A N/A
Jay Sanet 0 0.0% N/A N/A
------------ ------------ ------------
Total 0 0.0% N/A
-65-
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth information regarding the exercise of stock
options by Messrs. Vertes, Hrncir, Burman and Sanet as relates to the fiscal
year-end value of unexercised stock options held by our named executive officers
and directors. We have not issued any stock appreciation rights.
Number of Securities
Shares Underlying Value of Unexercised
Acquired Unexercised in-the-Money
on Value Options/SARs at Options/SARs at Fiscal
Exercise Realized Fiscal Year-End Year-End
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---------- ---------- ------------- ------------- ------------- -------------
Tibor N. Vertes N/A N/A N/A N/A N/A N/A
Gregory L. Hrncir N/A N/A N/A N/A N/A N/A
Kevin J. Burman N/A N/A N/A N/A N/A N/A
Jay Sanet N/A N/A N/A N/A N/A N/A
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions Involving Tibor N. Vertes
From our inception through June 30, 2002, Mr. Vertes, our Chairman and
Chief Executive Officer, was not paid a salary. On December 31, 2002, Mr. Vertes
converted his accrued salary, in the amount of $339,000, and short-term loans to
us, in the amount of $19,281, into 477,707 shares of our common stock and a
warrant to purchase 477,707 shares of common stock. The foregoing conversions
were made on terms identical to the securities sold by us in a private placement
by us in 2003. As part of our reorganization with NorStar, the 477,707 shares
were forward split on a 1.22197:1 basis, the result of which is 583,746 shares
of our common stock.
On October 28, 2003, Robit Nominees Pty Ltd., an entity controlled by Mr.
Vertes, loaned $50,000 to us, as evidenced by a convertible promissory note. The
terms of the convertible promissory note provided for a $5,000 cash interest
payment upon maturity. In addition, Robit Nominees was issued a warrant to
purchase 50,000 shares of our common stock, exercisable for a period of one year
at an exercise price of $1.50 per share. The promissory note matured in February
2004 and has been paid in full. The warrant terminated on October 28, 2004 and
was not exercised.
On November 6, 2003, Daniel Vertes, our controller and the son of Tibor N.
Vertes, loaned us the sum of $25,000 Australian dollars ($17,729 as of such
date). The loan was evidenced by a promissory note bearing simple interest at
the rate of eight percent per annum. The promissory note matured on January 6,
2004 and has been paid in full.
On December 12, 2003, Mr. Vertes loaned $10,000 to us. The loan is
evidenced by a promissory note bearing simple interest at the rate of eight
percent per annum. The promissory note matured on January 31, 2004 and has been
paid in full.
On September 30, 2004, Tibor Vertes, our Chief Executive Officer and
Chairman, loaned the Company $42,852. The loan was repaid in October 2004
without interest.
-66-
Transactions Involving Gregory L. Hrncir
In March 2003, we purchased an outstanding loan made by Gregory L. Hrncir,
our President and a Director, to Innovative Gaming Corporation of America, or
IGCA, in the original principal amount of $125,000 in consideration for the
assignment by Mr. Hrncir of all rights as a secured creditor to certain assets
of IGCA. The purchase involved the issuance of a promissory note in favor of Mr.
Hrncir in the original principal balance amount of $133,657, the then
outstanding principal balance and interest on the original loan made by Mr.
Hrncir to IGCA. The original loan was made in contemplation of a Merger and Plan
of Reorganization Agreement entered into in February 2002 between the Company
and IGCA that was not completed. The note payable to Mr. Hrncir has been repaid
in full.
On December 1, 2003, Gregory L. Hrncir loaned $10,000 to us. The loan was
evidenced by a promissory note bearing simple interest at the rate of eight
percent per annum. The promissory note matured on January 31, 2004 and has been
repaid in full.
Transactions Involving Cantor G&W (Nevada), L.P.
In August 2004, GEG Holdings, LLC, or GEG, an affiliate of Cantor, loaned
us $750,000 pursuant to a senior secured bridge financing facility, or the
Bridge Financing. On December 8, 2004, we entered into a loan facility and
investment agreement, or the Investment Agreement, with Cantor pursuant to which
Cantor agreed to provide up to an additional $1,250,000, or the Additional
Amount, in senior secured debt financing to us, in exchange for, among other
things, the right to acquire control of us upon the conversion and exercise of
various securities issued to Cantor and by certain of our stockholders.
Immediately prior to the execution and delivery of the Investment Agreement, GEG
assigned to Cantor, and Cantor assumed from GEG, all of GEG's rights and
obligations with respect to the Bridge Financing pursuant to an assignment and
assumption agreement executed by Cantor and GEG, or the Assignment and
Assumption Agreement. Consequently, the Investment Agreement relates to an
aggregate of $2,000,000 of senior secured financing, or the Loan Amount.
Pursuant to the Investment Agreement, Cantor made the following loans to
us: (i) $250,000 upon the execution of the Investment Agreement; (ii) $500,000
on December 31, 2004; (iii) $250,000 on March 31, 2005; and (iv) $250,000 on
June 30, 2005. The Loan Amount is evidenced by a five (5) year senior secured
promissory note, or the Note, which matures in December 2009 and bears interest
at the federal funds rate of interest in effect from time to time, plus six
percent (6%) per annum. Interest accrues semi-annually, in arrears, on December
1 and June 1 of each year during the term of the Note. The Note does not require
us to make cash interest payments until maturity. The Note is secured by a
perfected, first priority security interest in all of our intellectual property
assets. Cantor's first priority security interest in the intellectual property
is evidenced by a security agreement, or the Security Agreement, that was
executed and delivered upon the execution of the Bridge Financing and was
assigned to Cantor pursuant to the Assignment and Assumption Agreement.
In connection with the Investment Agreement, Cantor received the right to
acquire control of the Company pursuant to various equity instruments that we
issued to Cantor, as well as the option and irrevocable proxy agreement issued
to Cantor by certain of our stockholders. Specifically, we issued Cantor a five
(5) year stock purchase warrant, or the Equity Warrant, immediately exercisable
in whole or in part for up to at least eight million (8,000,000) shares of our
common stock, at an exercise price of $0.60 per share.
Cantor also received a stock purchase warrant relative to the Loan Amount,
or the Debt Warrant, which is immediately exercisable in whole or in part by
Cantor, at its election, either for cash, or by converting all or a portion of
the then outstanding principal amount of the Note into shares of common stock.
The initial per share exercise price of the Debt Warrant, subject to adjustment,
is equal to the lesser of (i) the average of the closing market price of our
common stock for the thirty (30) days prior to the applicable exercise date, but
in no event less than $0.40 per share, and (ii) $0.54 per share. The Debt
Warrant has also has anti-dilution protection such that at all times it is
exercisable into no less than a fixed percentage of our issued and outstanding
common stock on a fully diluted basis exclusive of the Equity Warrant and the
Debt Warrant issued to Cantor. In the event and to the extent Cantor exercises
the Debt Warrant with cash, rather than converting the then outstanding
principal amount of the Note, the Loan Amount evidenced by the Note will remain
a continuing liability of the Company.
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Interest on the Note is payable in cash only at maturity. Cantor has the
right to convert the accrued interest on the Note into shares of common stock
pursuant to one or more interest warrants, or the Interest Warrant, at a price
per share equal to the lesser of (a) the average of the closing market price of
our common stock for the thirty (30) days prior to the applicable interest
payment date, but in any event not less than $0.40 per share, and (b) $0.54 per
share, rounded up to the nearest share.
Cantor also entered into an option agreement and irrevocable proxy, or the
Option Agreement, with various parties, including certain of the executive
officers and directors of the Company, or the Optionors. Under the terms of the
Option Agreement, Cantor has an irrevocable option, or the Option, to purchase
up to 7,500,000 shares of common stock, or the Option Shares, beneficially owned
by the Optionors on the following terms: (A) upon the execution of the Option
Agreement until December 31, 2005, up to 7,500,000 Option Shares, at an exercise
price of $0.60 per share; (B) from January 1, 2006 until December 31, 2006, the
balance of the 7,500,000 Option Shares not purchased prior to this period, not
to exceed 5,000,000 Option Shares, at an exercise price of $0.80 per share; and
(C) from January 1, 2007 until December 31, 2007, the balance of the 7,500,000
Option Shares not purchased prior to this period, not to exceed 2,500,000 Option
Shares, at an exercise price of $1.00 per share; provided, however, that Cantor
shall not be able to exercise the Option to acquire more than 54% of the Common
Stock. The Optionors also granted Cantor a right of first refusal with respect
to any proposed sale by an Optionor of their Option Shares. Upon the execution
of the Option Agreement, the Optionors agreed to vote all of their shares of
Common Stock, including but not limited to their Option Shares, in favor of any
Cantor nominee to the Board of Directors. Finally, the Optionors have granted
Cantor an irrevocable proxy with respect to all of their shares of Common Stock,
including their Option Shares, which shall only be effective upon Cantor's
acquisition of beneficial ownership of at least 11,700,000 shares of the
Company's common stock.
Simultaneously upon the entering into the Investment Agreement, Cantor,
the Company, and the Company's wholly owned subsidiary, Gaming & Entertainment
Technology Pty Ltd., or GET, also entered into an Amended and Restated Software
Development and License Agreement, or the Software Agreement. The Software
Agreement provides for royalties and development revenues to be paid by Cantor
to the Company, and requires that the Company develop for and license to Cantor,
on an exclusive basis throughout the world (subject only to a pre-existing
license previously granted by the Company and GET to a third party), the
Company's proprietary gaming software for use in connection with the Internet
and/or any other technology, whether now existing or hereafter devised using a
computer or similar device. The Company was engaged in software development for
Cantor throughout fiscal year 2005.
On February 15, 2006, the Company, GET and Cantor entered into an asset
purchase agreement, or the Cantor Asset Purchase Agreement. Pursuant to the
terms of the Cantor Asset Purchase Agreement, Cantor paid the Company $500,000
in consideration for certain assets, including (i) the source and object code
relating to the software previously licensed by Cantor pursuant to the License
Agreement, including all intellectual property rights thereto, and all related
documentation, (ii) all graphics relating to the source code for all Internet
casino developed previously by the Company, excluding certain graphics owned by
third parties and (iii) various hardware consisting of computer servers,
personal computers and other computer equipment.
-68-
The terms of the Cantor Asset Purchase Agreement also include (I) the
termination of the License Agreement between the Company and Cantor, (II) the
termination of the Investment Agreement between the Company and Cantor, (III) an
amendment to the Note issued in favor of Cantor which provides for the
following: (a) for the forgiveness, on an annual basis during the period the
Note remains outstanding, of outstanding principal and accrued interest under
the Note in an amount equal to the royalties that would have been payable to the
Company relating to the Cantor Casino and all future "white-label" Internet
casino clients of Cantor had the License Agreement not been terminated; (b) an
amendment to paragraph 5(b) of the Note relating to a "change of control" of the
Company so that Cantor may only require immediate repayment of the Note in the
event a "person" or "group" (as such terms are used in Section 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) becomes the beneficial
owner, directly or indirectly, of 51% of the voting common stock of the Company
(i) through acquisition of common stock of the Company, (ii) as a result of a
merger or consolidation involving the Company, or (iii) as a result of the sale
of all or substantially all of the assets of the Company, and (c) allows for
prepayments of the outstanding principal and accrued interest under the Note,
(IV) an amendment to the Security Agreement between the Company and Cantor which
provides that Cantor's security interest in the assets of the Company shall be
subordinated with respect to any collateral acquired by the Company with the
proceeds of any future debt or equity issuances, (V) an amendment to the Equity
Warrant to reduce the number of shares exercisable thereunder, at a price of
$0.60 per share, from 8,000,000 shares to 2,000,000 shares, and (VI) the
termination of the Option Agreement.
In conjunction with the Cantor Asset Purchase Agreement, all further
obligations of the Company, pursuant to the Absolute Asset Purchase Agreement
have been terminated, including the cancellation of the remaining $100,000 due
Absolute Game, Ltd. thereunder. In addition, the consulting agreement with Peter
Bengtsson has been terminated, which includes the cancellation of $156,000 in
consulting fees under such agreement.
On February 15, 2006, Kevin J. Burman, Chief Operating Officer of the
Company and a director of each of its wholly-owned subsidiaries, resigned from
all of the above positions. Mr. Burman accepted employment with Cantor as its
Chief Development Officer. The foregoing was mutually agreed upon by Mr. Burman,
the Company and Cantor. Mr. Burman's resignation did not involve any
disagreement with the Company, its officers or directors.
Indemnification of Directors and Officers
We have provided for indemnification to the fullest extent permitted under
Utah law in our articles of incorporation and bylaws. We do not currently
maintain a directors' and officers' liability insurance policy, but may do so in
the future.
ITEM 13. EXHIBITS
(a) Please see exhibits listed on the Exhibit Index following the
signature page of this Annual Report on Form 10-KSB, which is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item is as follows:
J.H. Cohn LLP, or J.H. Cohn, has served as our independent registered
public accounting firm for the fiscal years ended December 31, 2005 and 2004,
and was selected by our board for the fiscal year ended December 31, 2005, and a
majority of our stockholders as our independent registered public accounting
firm for the fiscal year ended December 31, 2004.
Our board is responsible for pre-approving all audit and permissible
non-audit services provided by J.H. Cohn, with certain limited exceptions. Our
board of directors has concluded that the non-audit services provided by J.H.
Cohn are compatible with maintaining auditor independence. In 2005, no fees were
paid to J.H. Cohn pursuant to the "de minimus" exception to the pre-approval
policy permitted under the Exchange Act.
-69-
For the fiscal years ended December 31, 2005 and 2004, the fees for
services provided by J.H. Cohn were as follows:
2005 2004
----------- -----------
Audit fees(1) $101,759 $81,507
Audit-related fees (2) 0
Tax fees (3) 1,635
All other fees 0
----------- -----------
$101,759 $83,142
=========== ===========
(1) Audit fees: Fees for the professional services rendered for the audit of
our annual financial statements, review of financial statements included
in our Form 10-QSB filings, and services normally provided in connection
with statutory and regulatory filings or engagements, including
registration statements.
(2) Audit-related fees: Fees for assurance and related services that are
reasonably related to the performance of the audit or review of our
financial statements.
(3) Tax fees: Fees for professional services rendered with respect to tax
compliance, tax advice and tax planning. This includes preparation of tax
returns, claims for refunds, payment planning and tax law interpretation.
-70-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on our behalf by the undersigned,
thereunto duly authorized.
GAMING & ENTERTAINMENT GROUP, INC.
(Registrant)
By: /s/ Gregory L. Hrncir
---------------------------------
Gregory L. Hrncir, President
Date: April 17, 2006
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
----------------------- ------------------------------------- ---------------
Chairman and Chief Executive
/s/ Tibor N. Vertes Officer April 17, 2006
-----------------------
Tibor N. Vertes (Principal Executive Officer)
/s/ Gregory L. Hrncir President, Secretary and Director April 17, 2006
-----------------------
Gregory L. Hrncir (Principal Financial and Accounting
Officer)
/s/ Jay Sanet Director April 17, 2006
-----------------------
Jay Sanet
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EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION PAGE
2.1 Agreement and Plan of Reorganization dated as of September 18, 2003, by and (1)
among NorStar Group, Inc., a Utah corporation, Gaming & Entertainment Group,
Inc., a Nevada corporation, and certain of the holders of shares of common
stock of Gaming & Entertainment Group, Inc., a Nevada corporation.
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (2)
4.1 Stock Certificate Specimen (2)
10.1 Employment Agreement of Tibor N. Vertes dated August 31, 2003 (2)
10.2 Employment Agreement of Gregory L. Hrncir dated August 31, 2003 (2)
10.3 Employment Agreement of Will McMaster dated August 31, 2003 (2)
10.4 Lease Agreement by and among Gaming & Entertainment Group, Inc. and Airport (2)
Plaza Associates, LLC dated February 24, 2004; First Amendment
to Lease Agreement dated March 10, 2004
10.5 Employment Agreement of Kevin J. Burman dated September 1, 2004 (2)
10.6 Loan Facility and Investment Agreement by and between Gaming & Entertainment (3)
Group, Inc. and Cantor G&W (Nevada), L.P. dated December 8, 2004
10.7 Senior Secured Note by and between Gaming & Entertainment Group, Inc. and (3)
Cantor G&W (Nevada), L.P. dated December 8, 2004
10.8 Equity Warrant issued in favor of Cantor G&W (Nevada), L.P. dated December 8, (3)
2004
10.9 Debt Warrant issued in favor of Cantor G&W (Nevada), L.P. dated December 8, 2004 (3)
10.10 Form of Interest Warrant to be issued in favor of Cantor G&W (Nevada), L.P. (3)
10.11 Option Agreement and Irrevocable Proxy by and between Cantor G&W (Nevada), (3)
L.P., on the one hand, and Tibor N. Vertes, the Vertes Family Trust, Gregory L.
Hrncir, the Hrncir Family Trust, Kevin J. Burman, Sheldon Harkness, Zen
Investments Pty Ltd, Andrew Sorensen, and Gaming & Entertainment Group, Ltd.,
on the other hand, dated December 8, 2004
10.12 Amended and Restated Software Development and License Agreement by and between (3)
Cantor G&W (Nevada), L.P., on the one hand, and Gaming & Entertainment Group,
Inc. and Gaming & Entertainment Technology Pty Ltd, on the other hand, dated
December 8, 2004
10.13 Amended and Restated Source Code Escrow Agreement by and between Gaming & (3)
Entertainment Group, Inc., Gaming and Entertainment Technology, Pty Ltd, Cantor
G&W (Nevada), L.P., GEG Holdings, LLC, a Delaware limited liability company
having an address at 135 East 57th Street, New York, New York 10022
("Licensee"), Zukerman Gore & Brandeis, LLP, located at 875 Third Avenue, New
York, New York 10022 ("ZGB") and BMM International Pty Limited of Level 3,
37-41 Prospect Street, Box Hill, Victoria 3128, Australia ("BMM"), dated
December 8, 2004
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10.14 Asset Purchase Agreement by and between Gaming & Entertainment Group, Inc. and (4)
Absolute Game, Ltd. dated March 14, 2005
10.15 Consulting Agreement by and between Gaming & Entertainment Group, Inc. and (4)
Peter Bengtsson dated March 14, 2005
10.16 Common Stock Purchase Warrant issued in favor of Peter Bengtsson dated March (4)
14, 2005
10.17 Asset Purchase Agreement by and between Gaming and Entertainment Group, Inc., (5)
Gaming & Entertainment Technology Pty Limited and Cantor G&W (Nevada),
L.P. dated February 15, 2006
Amendment No. 1 to Senior Secured Note issued in favor of Cantor G&W (Nevada),
10.18 L.P. dated February 15, 2006 (5)
10.19 Amendment No. 1 to Security Agreement by and between Gaming and Entertainment (5)
Group, Inc., Gaming & Entertainment Technology Pty Limited and Cantor G&W
(Nevada), L.P. dated February 15, 2006
10.20 Amended and Restated Equity Warrant issued in favor of Cantor G&W (Nevada), (5)
L.P. dated February 15, 2006
10.21 Bill of Sale by and between Gaming and Entertainment Group, Inc., Gaming & (5)
Entertainment Technology Pty Limited and Cantor G&W (Nevada), L.P. dated
February 15, 2006
21.1 List of Subsidiaries 74
31.1 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 75
U.S.C. Section 1350
31.2 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 76
U.S.C. Section 1350
32.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 77
U.S.C. Section 1350
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(1) Previously filed as an exhibit to the registrant's Proxy Statement on
Schedule 14A, as filed with the Commission on December 22, 2003.
(2) Previously filed as an exhibit to the registrant's Annual Report on Form
10-KSB, as filed with the Commission on April 14, 2004.
(3) Previously filed as an exhibit to the registrant's Current Report on Form
8-K, as filed with the Commission on December 9, 2004.
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(4) Previously filed as an exhibit to the registrant's Current Report on Form
8-K, as filed with the Commission on March 18, 2005.
(5) Previously filed as an exhibit to the registrant's Current Report on Form
8-K/A, as filed with the Commission on February 22, 2006.
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