UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM 10-QSB/A
MARK ONE
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER000-25843
ELECTRONIC GAME CARD, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0570975
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
19th Floor, 712 5th Avenue, New York, NY 10019
(Address of Principal Executive Offices)
(646) 723-8946
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]
Traditional small business disclosure format Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: June 2, 2005 - 25,580,224
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
----------- -----------
(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash & Cash Equivalents ............... $ 7,937,231 $ 1,082,558
Accounts Receivable ................... 154,500 80,250
Deposit on Inventory .................. 72,852 141,800
Value Added Tax Receivable ............ 35,162 46,235
Related Party Receivable .............. 118,430 61,560
Note Receivable ....................... 1,425 143,468
----------- -----------
Total Current Assets ............. 8,319,600 1,555,871
PROPERTY AND EQUIPMENT:
Plant and Machinery Equipment ......... 7,185 7,185
Office Equipment ...................... 62,806 58,987
Furniture & Fixtures .................. 366 366
Less: Accumulated Depreciation ........ (31,255) (25,819)
----------- -----------
Net Fixed Assets ................. 39,102 40,719
OTHER ASSETS
Investment in Joint Venture ........... 994,063 1,000,000
----------- -----------
TOTAL ASSETS ............................... $ 9,352,765 $ 2,596,590
=========== ===========
2
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Continued)
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable .......................... $ 403,669 $ 620,736
Related Party Payable ..................... 97,500 --
Accrued Payroll Liabilities ............... -- 41,087
Unearned Revenue .......................... -- 62,370
------------ ------------
Total Current Liabilities ............ 501,169 724,193
NON-CURRENT LIABILITIES:
Convertible Note Payable, net ............. 7,774,095 --
Interest Payable .......................... 9,686 --
Total Non-Current Liabilities ........ 7,783,781 --
------------ ------------
TOTAL LIABILITIES ......................... 8,284,950 724,193
STOCKHOLDERS' EQUITY
Common Stock, Par Value $.001,
Authorized 100,000,000 shares
Issued 25,071,862 and 24,936,928
shares at March 31, 2005 and
December 31, 2004 ......................... 25,072 24,937
Paid-In Capital ................................ 12,323,304 12,207,471
Stock Subscription Receivable .................. -- (139,189)
Currency Translation Adjustment ................ (646,576) (513,178)
Retained Deficit ............................... (157,495) (157,495)
Deficit Accumulated During the
Development Stage ......................... (10,476,490) (9,550,149)
------------ ------------
TOTAL STOCKHOLDERS'S EQUITY ............... 1,067,815 1,872,397
TOTAL LIABILITIES AND STOCKHOLDERS'S EQUITY .... $ 9,352,765 $ 2,596,590
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Cumulative
Since
April 6, 2000
For the Three Months Ended Inception of
March 31, Development
2005 2004 Stage
------------ ------------ ------------
<S> <C> <C> <C>
Revenue: ....................................... $ 136,635 $ 80,250 $ 225,202
Cost of Good Sold .............................. 114,060 -- 181,215
------------ ------------ ------------
Gross Profit (Loss) ............................ 22,575 80,250 43,987
Expenses:
Selling and Marketing Expense .................. 53,436 180,361 1,177,480
General & Administrative ....................... 611,200 80,805 1,846,569
Consulting Expenses ............................ 92,682 349,780 2,053,651
Salaries and Wages ............................. 214,142 166,722 1,370,470
Compensation from issuance of Options/Warrants . -- -- 4,099,852
------------ ------------ ------------
Total Operating Expenses .................. 971,460 777,668 10,548,022
Loss from Operations ...................... (948,885) (697,418) (10,504,035)
------------ ------------ ��------------
Other Income (Expense)
Currency Translation ........................... 106,905 -- 106,905
Interest, Net .................................. (84,361) 479 (76,594)
Settlement of Litigation ....................... -- -- 42,154
------------ ------------ ------------
Net Loss from Continuing Operations before Taxes (926,341) (696,939) (10,431,570)
Income Taxes ................................... -- -- (455)
Net Loss from Continuing Operations ....... (926,341) (696,939) (10,432,025)
------------ ------------ ------------
Discontinued Operations:
Net Loss from discontinued operations
net of tax effects of $0 ............... -- (4,309) (8,138)
Loss on disposal of discontinued operations
net of tax effects of $0 ............... -- -- (36,327)
Total Loss from Discontinued Operations ... -- (4,309) (44,465)
------------ ------------ ------------
Net Loss .................................. $ (926,341) $ (701,248) $(10,476,490)
------------ ------------ ------------
Basic & Diluted Loss Per Share:
Continuing Operations ..................... $ (0.04) $ (0.04)
Discontinued Operations ................... -- --
$ (0.04) $ (0.04)
Weighted Average Shares ........................ 24,955,613 16,838,712
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Cumulative
Since
April 6, 2000
For the Three Months Ended Inception of
March 31, Development
2005 2004 Stage
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ......................................... $ (926,341) $ (701,248) $(10,476,490)
------------ ------------ ------------
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation ..................................... 5,806 12,192 31,624
Stock Issued for Expenses ........................ -- -- 114,959
Compensation for Options/Warrants ................ -- -- 3,951,863
Cashless exercise of Warrants .................... -- -- 147,989
Foreign Currency Translation ..................... -- (115,457) (513,178)
Net Loss from Discontinues Operations ............ -- 4,309 8,138
Loss on Disposal of Operations ................... -- -- 36,327
Amortization of Interest Expense ................. 74,924 -- 74,924
Change in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable ....... (75,388) (80,250) (155,638)
(Increase) Decrease in Deposit on Inventory ...... 66,937 -- (74,863)
(Increase) Decrease in Prepaid Expenses .......... -- (186) --
(Increase) Decrease in Value Added Tax Receivable 10,417 (12,273) (35,818)
Increase (Decrease) in Accounts Payable .......... (208,263) (126,626) 342,881
Increase (Decrease) in Accrued Payroll Liabilities (40,504) 42,375 583
Increase (Decrease) in Unearned Revenue .......... (61,486) -- 884
Increase (Decrease) in Interest Payable .......... 9,686 -- 9,686
------------ ------------ ------------
Net Cash Used in continuing activities ......... (1,144,212) (977,164) (6,536,129)
Net Cash Used in discontinued activities ....... -- -- (1,250)
------------ ------------ ------------
Net Cash Used in operating activities .......... (1,144,212) (977,164) (6,537,379)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Acquired in Merger .......................... -- -- 3,834
Purchase of Plant and Machinery Equipment ........ -- -- (7,185)
Purchase of Office Equipment ..................... (4,656) (35,889) (63,643)
Purchase of Furniture & Fixture .................. -- -- (366)
Investment in Joint Venture ...................... 8,245 -- (991,755)
------------ ------------ ------------
Net cash provided by investing activities ...... 3,589 (35,889) (1,059,115)
------------ ------------ ------------
</TABLE>
5
<PAGE>
<TABLE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Unaudited)
<CAPTION>
Cumulative
since
April 6,
2000
For the Three Months Ended Inception of
March 31, Development
2005 2004 Stage
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Sale of Common Stock .............. 115,771 6,110,266 7,980,110
Amount Loaned on Related Party Receivable ....... (57,744) -- (119,304)
Amount Loaned on Note Receivable ................ -- (16,316) (143,468)
Payment on Notes Receivables .................... 140,009 -- 140,009
Proceeds from Related Party Payable ............. 97,500 -- 97,500
Payment on Long-Term Note Payable ............... -- (1,030,086) (969,407)
Proceeds from Long-Term Note Payable ............ -- 12,482 848,174
Proceeds from Convertible Note Payable .......... 7,699,219 -- 7,699,219
------------ ------------ ------------
Net Cash Provided by Financing Activities ..... 7,994,755 5,076,346 15,532,833
------------ ------------ ------------
Net (Decrease) Increase in Cash ................. $ 6,854,132 $ 4,063,293 $ 7,936,339
Foreign Exchange Effect on Cash ................. 541 100 (2,697)
Cash at Beginning of Period ..................... 1,082,558 6,732 --
------------ ------------ ------------
Cash at End of Period ........................... $ 7,937,231 $ 4,070,125 $ 7,933,642
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ...................................... $ -- $ -- $ 1,470
Income taxes .................................. $ -- $ -- $ 455
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On May 5, 2003, the Company acquired in a reverse acquisition of Electronic Game
Card Marketing $1,735 in cash, accounts payable of $69,646 and a long-term note
payable of $121,233, in exchange for all of the Company's outstanding common
stock.
On December 5, 2003, the Company acquired in a reverse acquisition of Scientific
Energy, Inc. $2,099 in cash, technology valued at $50,000, accounts payable of
$5,595 and a note payable to a shareholder of $1,095.
During 2004, the Company issued 114,800 shares of stock in exchange for
services.
During 2004, the Company issued 75,892 shares of stock in exchange for the
cashless exercise of warrants. In connection with this cashless exercise the
Company recorded compensation in the amount of $147,913.
During 2004, the Company issued options and warrants with an exercise price
below fair market value as a result the Company has recorded Compensation in the
amount of $3,951,863.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD APRIL 6, 2000 (INCEPTION) MARCH 31, 2005
<CAPTION>
Share
Common Stock Paid-In Subscription Currency
Shares Par Value Capital Receivable Translation
---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
August 2, 2002, Shares Issued for
Services .............................. 12,696,595 $ 12,697 $ -- $ -- $ --
Currency Translation ................... -- -- -- -- (25,927)
Net Loss ............................... -- -- -- -- --
---------- ---------- ------------ ------------ ----------
Total Comprehensive Income ............. -- -- -- -- (25,927)
---------- ---------- ------------ ------------ ----------
Balance December 31, 2002 .............. 12,696,595 12,697 -- -- (25,927)
December 5, 2003, Shares Issued in
connection with Reverse Acquisition of
Scientific Energy, Inc. .............. 1,126,467 1,126 -- -- --
Currency Translation ................... -- -- -- -- (92,514)
Net Loss ............................... -- -- -- -- --
---------- ---------- ------------ ------------ ----------
Total Comprehensive Income ............. -- -- -- -- (92,514)
---------- ---------- ------------ ------------ ----------
Balance December 31, 2003 .............. 13,823,062 13,823 -- -- (118,441)
<CAPTION>
Deficit
Accumulated
Since
April 6, 2000 Total
Inception of Stockholders'
Retained Development Equity
Deficit Stage (Deficit)
----------- ----------- -----------
<S> <C> <C> <C>
August 2, 2002, Shares Issued for
Services .............................. $ (12,539) $ -- $ 158
Currency Translation ................... -- -- (25,927)
Net Loss ............................... -- (391,403) (391,403)
----------- ----------- -----------
Total Comprehensive Income (loss) ...... -- (391,403) (417,330)
----------- ----------- -----------
Balance December 31, 2002 .............. (12,539) (391,403) (417,172)
December 5, 2003, Shares Issued in
connection with Reverse Acquisition of
Scientific Energy, Inc. .............. (144,956) -- (143,830)
Currency Translation ................... -- -- (92,514)
Net Loss ............................... -- (542,000) (542,000)
----------- ----------- -----------
Total Comprehensive Income (loss) ...... -- (542,000) (634,514)
----------- ----------- -----------
Balance December 31, 2003 .............. (157,495) (933,403) (1,195,516)
</TABLE>
7
<PAGE>
<TABLE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD APRIL 6, 2000 (INCEPTION) TO MARCH 31, 2005 (Continued)
<CAPTION>
Stock
Common Stock Paid-In Subscription Currency
Shares Par Value Capital Receivable Translation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 2003 13,823,062 $ 13,823 $ -- $ -- $ (118,441)
Stock issued in exchange for cash 6,853,750 6,854 6,846,896 -- --
Cost of private placement -- -- (743,483) -- --
Stock issued in exchange for cash 2,171,594 2,172 1,083,625 -- --
Stock issued for Fundraising 1,174,000 1,174 (1,174) -- --
Compensation for Options/Warrants -- -- 3,951,863 -- --
Warrants exercised for cash 343,666 344 343,322 -- --
Warrants exercised for stock 75,892 76 147,913 -- --
Options exercised for cash 100,000 100 99,900 -- --
Stock sold for cash 50,000 50 24,950 -- --
Stock sold for cash 215,250 215 338,974 (139,189) --
Stock issued for services 114,800 115 114,685 -- --
Stock sold for cash 14,914 14 -- -- --
Currency Translation -- -- -- -- (394,737)
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Comprehensive Income (loss) -- -- -- -- (394,737)
------------ ------------ ------------ ------------ ------------
Balance December 31, 2004 24,936,928 $ 24,937 $ 12,207,471 $ (139,189) $ (513,178)
============ ============ ============ ============ ============
Currency translation -- -- -- -- 106,905
Net Loss
Balance March 31, 2005 24,936,928 24,937 12,207,471 (139,189) (406,273)
=========== ========== ============ ============ ============
<CAPTION>
Deficit
Accumulated
Since
April 6, 2000 Total
Inception of Stockholders'
Retained Development Equity
Deficit Stage (Deficit)
------------ ------------ ------------
<S> <C> <C> <C>
Balance December 31, 2003 $ (157,495) $ (933,403) $ (1,195,516)
Stock issued in exchange for cash -- -- 6,853,750
Cost of private placement -- (743,483)
Stock issued in exchange for cash -- -- 1,085,797
Stock issued for Fundraising -- -- --
Compensation for Options/Warrants -- -- 3,951,863
Warrants exercised for cash -- -- 343,666
Warrants exercised for stock -- -- 147,989
Options exercised for cash -- -- 100,000
Stock sold for cash -- -- 25,000
Stock sold for cash -- -- 200,000
Stock issued for services -- -- 114,800
Stock sold for cash -- -- 14
Currency Translation -- -- (394,737)
Net Loss -- (8,616,746) (8,616,746)
------------ ------------ ------------
Total Comprehensive Income (loss) -- (8,616,746) (9,011,483)
------------ ------------ ------------
Balance December 31, 2004 $ (157,495) $ (9,550,149) $ 1,872,397
============ ============ ============
Currency Translation -- -- 106,905
Net Loss -- (819,436) (819,436)
Balance March 31, 2005 $ (157,495) (10,369,298) 1,169,866
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Electronic Game, Inc.(a development
stage company) is presented to assist in understanding the Company's financial
statements. The accounting policies conform to generally accepted accounting
principles and have been consistently applied in the preparation of the
financial statements.
INTERIM REPORTING
The unaudited financial statements as of March 31, 2004 and for the three month
period then ended reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to fairly state the
financial position and results of operations for the three months. Operating
results for interim periods are not necessarily indicative of the results which
can be expected for full years.
NATURE OF OPERATIONS AND GOING CONCERN
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a "going concern", which assume that the
Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
ORGANIZATION AND BASIS OF PRESENTATION
The Company was incorporated under the laws of the United Kingdom on April 6,
2000, under the name of Electronic Game Card, Ltd. Until 2002, the Company
remained dormant and had no operations. On May 5, 2003, the Company entered into
an agreement whereby it acquired 100% of the outstanding stock of Electronic
Game Card Marketing, a Delaware Company.
On December 5, 2003, the Company acquired 100% of the outstanding stock of the
Electronic Game Card, Inc. (Nevada) in a reverse acquisition. At this time, a
new reporting entity was created and the name of the Company was changed to
Electronic Game Card, Inc.
As of March 31, 2005, the Company is in the development stage and has not begun
planned principal operations.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the following
companies:
o Electronic Game Card, Inc. ( Nevada Corporation)
o Electronic Game Card, Ltd. (United Kingdom Corporation)
o Electronic Game Card Marketing (A Delaware Corporation)
The results of subsidiaries acquired during the year are consolidated from their
effective dates of acquisition. All significant intercompany accounts and
transactions have been eliminated.
NATURE OF BUSINESS
The Company plans to engage in the development, marketing, sale and distribution
of recreational electronic software which primarily targeted towards lottery and
sales promotion markets through its Great Britain subsidiary.
9
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
CONCENTRATION OF CREDIT RISK
The Company has no significant off-balance-sheet concentrations of credit risk
such as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents to the extent the funds are not being held for investment
purposes.
DEPRECIATION
Fixed assets are stated at cost. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the assets as follows:
Asset Rate
----------------------------- -------
Plant and Machinery Equipment 3 years
Office Equipment 3 years
Maintenance and repairs are charged to operations; betterments are capitalized.
The cost of property sold or otherwise disposed of and the accumulated
depreciation thereon are eliminated from the property and related accumulated
depreciation accounts, and any resulting gain or loss is credited or charged to
income.
Depreciation Expense for the three months ending March 31, 2005 and 2004 were
$5,806 and $12,192.
ADVERTISING COSTS
Advertising costs are expensed as incurred. For the three months ended March 31,
2005 and 2004, advertising costs were $53,436 and $180,361, respectively.
REVENUE RECOGNITION
Revenue is recognized from sales of product at the time of shipment to
customers.
FOREIGN CURRENCY TRANSLATION
The Company's functional currency is the British Pound and the reporting
currency is the U.S. Dollar. All elements of financial statements are translated
using a current exchange rate. For assets and liabilities, the exchange rate at
the balance sheet date is used. Stockholders' Equity is translated using the
historical rate. For revenues, expenses, gains and losses the weighted average
exchange rate for the period is used. Translation gains and losses are included
as a separate component of stockholders' equity. Gain and losses resulting from
foreign currency transactions are included in net income.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
10
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LOSS PER SHARE
Basic loss per share has been computed by dividing the loss for the year
applicable to the common stockholders by the weighted average number of common
shares outstanding during the years. As of March 31, 2005, the Company had
13,101,143 option and warrants outstanding to purchase up to 13,101,143 shares
of common stock. However, the effect of the Company's common stock equivalents
would be anti-dilutive for March 31, 2005 and 2004 and are thus not considered.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No.109 requires recognition of deferred
income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax bases of assets and liabilities.
STOCK COMPENSATION FOR NON-EMPLOYEES
The Company accounts for the fair value of its stock compensation grants for
non-employees in accordance with FASB Statement 123. The fair value of each
grant is equal to the market price of the Company's stock on the date of grant
if an active market exists or at a value determined in an arms length
negotiation between the Company and the non-employee.
NOTE 2 - INCOME TAXES
The Company is subject to income taxes in the United States of America, United
Kingdom, and the state of New York. As of December 31, 2004, the Company had a
net operating loss carryforward for income tax reporting purposes of
approximately $6,308,687 in the United States and $3,503,438 in the United
Kingdom that may be offset against future taxable income through 2023. Current
tax laws limit the amount of loss available to be offset against future taxable
income when a substantial change in ownership occurs. Therefore, the amount
available to offset future taxable income may be limited. No tax benefit has
been reported in the financial statements, because the Company believes there is
a 50% or greater chance the carry-forwards will expire unused. Accordingly, the
potential tax benefits of the loss carry-forwards are offset by a valuation
allowance of the same amount.
For the years ending December 31, 2004 and 2003 income tax expense was $0 and
$455.
NOTE 3 - DEVELOPMENT STAGE COMPANY
The Company has not begun principal operations and as is common with a
development stage company, the Company has had recurring losses during its
development stage. The Company's financial statements are prepared using
generally accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. However, as of March 31, 2005, the Company did not
have significant cash or other material assets, nor did it have an established
source of revenues sufficient to cover its operating costs and to allow it to
continue as a going concern.
11
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 4 - NOTES RECEIVABLE
As of March 31, 2005 and December 31, 2004, the following amounts were owed to
the Company: Interest rate is the 1 month libor rate of 1.544
March 31, December 31,
2005 2004
-------- -------
$ 1,425 $143,468
-------- --------
Total Note Receivable $ 1,425 $143,468
======== ========
NOTE 5 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2005 and the year ended December 31,
2004, the Company has certain related party receivables due on demand and are
non-interest bearing. In previous years, the Company and its subsidiaries had
borrowed from the same companies in excess of $1 million with little or no
interest. As of March 31, 2005 and December 31, 2004, $118,430 and $61,560, is
still owed to the Company.
During the three months ended March 31, 2005 and the year ended December 31,
2004, the Company has certain related party payables due on demand and are
non-interest bearing. In previous years, the Company and its subsidiaries had
borrowed from the same companies in excess of $1 million with little or no
interest. As of March 31, 2005 and December 31, 2004, $97,500 and $0, is still
owed by the Company.
NOTE 6- COMMON STOCK TRANSACTIONS
On August 2, 2002, the Company issued 99 shares at 1.00 British Pound or the
equivalent of $1.60, these shares were later forward split to 12,696,595 shares
in connection with the acquisition of Scientific Energy and it was recorded by
$12,539 credit to common stock of and a debit to retained earnings of $12,539.
All references to stock reflect the stock split.
On December 5, 2003, an additional 1,126,467 shares were issued to the previous
owners of Scientific Energy, Inc. and for the conversion of a note payable of
$31,344.
NOTE 6- COMMON STOCK TRANSACTIONS
On February 20, 2004, the Company issued 6,853,750 common shares and 3,426,875
warrants for $1.00 per share.
On October 12, 2004 the Company entered into a subscription agreement with
Scientific Games internantional, Inc. to purchased Two Million One Hundred
Seventy-One Thousand Five Hundred Ninety-Four (2,171,594) shares of newly-issued
common stock, par value $0.001 per share of the Company for an aggregate
purchase price of $1,085,797.50.
During 2004 the Company issued 419,558 shares of common stock from warrants in
exchange for $343,666 in cash.
During 2004 the Company issued 380,164 shares of common stock from the execution
of options in exchange for $463,974 in cash.
12
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 6 - COMMON STOCK TRANSACTIONS (Continued)
During 2004 the Company issued 1,174,000 shares of common stock for private
placement fundraising services.
During 2004 the Company issued 114,880 shares of common stock in exchange for
services.
During 2005 the Company issued 134,934 shares of common stock from warrants in
exchange for $115,833 in cash.
NOTE 7 - STOCK OPTIONS /WARRANTS
The Company has adopted a stock compensation plan entitled the 2002 Equity
Compensation Plan. Pursuant to this 2002 Equity Compensation Plan, grants of
shares can be made to(i) designated employees of Electronic Game Card Inc. (the
"Company") and its subsidiaries including Electronic Game Card Ltd, (ii) certain
advisors who perform services for the Company or its subsidiaries and (iii)
non-employee members of the Board of Directors of the Company (the "Board") with
the opportunity to receive grants of incentive stock options, nonqualified
options, share appreciation rights, restricted shares, dividend equivalent
rights and cash awards. The Company believes that the Plan will encourage the
participants to contribute materially to the growth of the Company, thereby
benefiting the Company's shareholders, and will align the economic interests of
the participants with those of the shareholders.
The 2002 Equity Compensation Plan provides for options equivalent up to 10% of
the issued share capital of the company to be offered. The original exercise
price of the options was equal to one half the price at which the Common Stock
is issued at the first public offering, however, subsequent to the adoption of
the 2002 Equity Compensation Plan the board determined that the exercise price
would be issued from a range of $0.50 to $2.00 per option. Those eligible to
participate in this plan are entitled to vest 25% of the stock offered in this
option for each six months of service with the Company. After vesting the
exercise of these options must be done within ten years of the option date. As
of December 31, 2004, 1,190,000 of a total possible of 1,200,000 options have
been distributed. No further stock option plans have been instituted. During
2004 the Company recorded $110,700 in compensation expense in connection with
options granted pursuant to this plan.
In connection with a private placement on February 20, 2004, the Company issued
3,426,875 warrants. Each warrant is exercisable for a period of five years at a
price of $1.00 for one share of common stock. The warrants were determined to
have no value at the time of their issuance.
In addition, on February 20, 2004, the Company issued additional warrants as
consideration for assistance in placing the common stock pursuant to the private
placement. The warrants were issued as follows: 1) Warrants to purchase up to
353,750 shares of common stock at an exercise price of $1.00 per share were
granted to Middlebury Capital LLC. These were granted as compensation for
placement agents for the private placement. These are exercisable through
February 20, 2009. 2) Warrants to purchase up to 32,000 shares of common stock
at an exercise price of $1.00 per share were granted to National Securities,
Inc. These were granted as compensation for placement agents for the common
stock. These are exercisable through February 20, 2009. 3) Warrants to purchase
up to 200,000 shares of common stock at an exercise price of $1.00 per share
were granted to First Securities USA, Inc. These were granted as compensation
for placement agents for the common stock. These are exercisable through
February 20, 2009. 4) Warrants to purchase up to 86,250 shares of common stock
at an exercise price of $1.00 per share were granted to IQ Ventures. These were
granted as compensation for placement agents for the common stock. These are
exercisable through February 20, 2009.
The company has agreed that warrant holders could elect to convert their
warrants by a cashless exercise. This provision permits the warrant holder to
cancel one half of the warrants at the then current share price to receive the
balance of the warrants in Common Stock without payment to the company. In 2004
the Company has
13
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 7 - STOCK OPTIONS /WARRANTS (Continued)
recorded $3,961,072 in compensation expense in connection with the granting and
cashless provision of the warrants detailed above.
NOTE 8 - DISCONTINUED OPERATIONS
On December 5, 2003, the Company entered into an agreement with Scientific
Energy, Inc. (Utah), that upon completion, 100% (20,000,000 shares) of the
Scientific Energy's shares would be returned, and the Company would cease to be
a wholly owned subsidiary of Electronic Game Card, Inc. On November 30, 2004,
the Company completed the disposal of the discontinued operations. The assets
and liabilities of Scientific Energy, Inc. (Utah) to be disposed of consisted of
the following:
November 30,
2004
�� -------
Cash ......................................... $ 40
Intangibles .................................. 50,000
-------
Total Assets ................................. 50,040
-------
Accounts Payable ............................. 11,978
Income Tax Payable ........................... 100
Shareholder Loan ............................. 1,635
-------
Total Liabilities ............................ 13,713
-------
Net Assets to be Disposed of ................. $36,327
=======
Operating results of this discontinued operation for the three months ended
March 31, 2004 are shown separately in the accompanying consolidated statement
of operations. The operating results of the discontinued operations for the
three months ended March 31, 2004 consist of the following:
General and Administrative Expenses ........... $ 4,298
Interest Expense .............................. 11
-------
Net Loss ...................................... $(4,309)
NOTE 9 - SETTLEMENT OF LITIGATION INCOME
Electronic Game Card, Ltd. was a party to a lawsuit brought in the Central
London County Court by a former consultant. The claim was for arrears of
remuneration totaling $49,117 (27,625UK), remuneration for six months' notice
period of $57,341 (32,250UK) to be assessed in relation to the Senior Executive
Bonus Scheme, interest, costs and "further or other relief" arising from EGC's
alleged breaches of a written agreement. In conjunction, EGC filed a
counterclaim which seeks damages in excess of $26,670 but limited to $88,900 and
interest. The claims were settled on the basis of a Consent Order dated November
13, 2004.
As a result of the Consent Order the Company provided payment in the amount of
$51,734 (27,000UK). In the accompanying Consolidated Statement of Operations
income from settlement of litigation has been recognized in the amount of
$42,154, which is the accurals that were previously booked less the final
judgement.
14
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 10 - COMMITMENTS
On September 1, 2004, the Company entered into a lease agreement with a related
party for office space in London on a one year lease agreement. The terms for
the agreement required a monthly rent of $5,748 (3,000UK). The total minimum
lease payments for the year ended December 31, 2005 is $45,984.
NOTE 11 - JOINT VENTURE
On October 12, 2004, the Company entered into a joint venture agreement with
Scientific Games International, Inc. ("SciGames:), to exclusively market and
promote the Company's Electronic Game Card product worldwide to national and
state lotteries. SciGames purchased Two Million One Hundred Seventy-One Thousand
Five Hundred Ninety-Four (2,171,594) shares of newly-issued common stock, par
value $0.001 per share of the Company for an aggregate purchase price of
$1,085,797.50 pursuant to a subscription agreement dated October 12, 2004. At
the closing, the Company contributed One Million Dollars ($1,000,000) to the
joint venture. The closing was completed on November 12, 2004 when the funds
cleared into the joint venture's account. As of March 31, 2005 and December 31,
2004, the investment in the joint venture was $994,063 and $1,000,000
respectively.
NOTE 12 - CONVERTIBLE PROMISSORY NOTE
On March 24, 2005, the Registrant sold $8,418,000 Convertible Promissory Notes
to accredited investors in a private placement of securities. This note is
payable upon written demand which may be made on or after March 31, 2007, unless
this note has been converted into shares of the Company's "Series A Preferred
Stock" or "Common Stock". The Interest rate of this note is 6%.
In connection with the convertible debt issuance on March 24, 2005 the company
incurred charges in the amount of $718,800. These costs are being amortized over
the two year life on the note and as of March 31, 2005 amortization amount that
has been booked to interest expense is $74,875.
Each $48,000 principal amount of a Convertible Promissory Note will
automatically convert into 32,000 shares of the Registrant's Series A
Convertible Preferred Stock, par value $0.001 per share (the "Series A Preferred
Stock"), upon the effectiveness of actions by the Registrant's shareholders to
authorize the Series A Preferred Stock. Each share of the Series A Preferred
Stock is initially convertible into one (1) share of the Registrant's common
stock, par value $0.001 per share (the "Common Stock"), which equates to an
initial conversion price of $1.50 per share of Common Stock. The Convertible
Promissory Notes may be converted, at the purchaser's discretion, directly into
Common Stock on an as-converted-into-Series-A-Preferred-Stock basis, whether or
not the Series A Preferred Stock is authorized and issued, and are immediately
convertible for such purpose. Consequently, each Convertible Promissory Note is
convertible ultimately into an aggregate of 32,000 shares of Common Stock. Also,
the Registrant issued one (1) warrant (a "Warrant") to acquire one (1) share of
Series A Preferred Stock for every two shares of Series A Preferred into which
the Convertible Promissory Notes are initially convertible. The Warrants shall
be exercisable to acquire shares of Series A Preferred Stock upon the
effectiveness of actions by the Registrant's shareholders to authorize the
Series A Preferred Stock. The Warrants shall be exercisable initially at $1.85
per share of Series A Preferred Stock, subject to adjustment, and shall be
exercisable for a period of 5 years. In addition, at the option of the holder,
each Warrant is also immediately exercisable directly to acquire, instead of
shares of Series A Preferred Stock, shares of Common Stock on an
as-converted-from-Series-A-Preferred-Stock basis, whether or not the Series A
Preferred Stock is ever authorized or issued. Unexercised Warrants shall expire
earlier upon notice by the Company to the holders of the Warrants following any
consecutive 30-day trading period during which the Common Stock trades on its
principal market at a price at or above three (3) times the then applicable
exercise price with average daily volume of at least 100,000 shares (subject to
adjustment of such trading volume threshold in the event of stock splits,
reverse stock splits, stock dividends, recapitalizations or similar events).
15
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 13 - SUBSEQUENT EVENTS
On April 6, 2005, the Registrant sold $248,000 Convertible Promissory Notes to
accredited investors in a private placement of securities. Each $48,000
principal amount of a Convertible Promissory Note will automatically convert
into 32,000 shares of the Registrant's Series A Convertible Preferred Stock, par
value $0.001 per share (the "Series A Preferred Stock"), upon the effectiveness
of actions by the Registrant's shareholders to authorize the Series A Preferred
Stock. Each share of the Series A Preferred Stock is initially convertible into
one (1) share of the Registrant's common stock, par value $0.001 per share (the
"Common Stock"), which equates to an initial conversion price of $1.50 per share
of Common Stock. The Convertible Promissory Notes may be converted, at the
purchaser's discretion, directly into Common Stock on an
as-converted-into-Series-A-Preferred-Stock basis, whether or not the Series A
Preferred Stock is authorized and issued, and are immediately convertible for
such purpose. Consequently, each Convertible Promissory Note is convertible
ultimately into an aggregate of 32,000 shares of Common Stock. Also, the
Registrant issued one (1) warrant (a "Warrant") to acquire one (1) share of
Series A Preferred Stock for every two shares of Series A Preferred into which
the Convertible Promissory Notes are initially convertible. The Warrants shall
be exercisable to acquire shares of Series A Preferred Stock upon the
effectiveness of actions by the Registrant's shareholders to authorize the
Series A Preferred Stock. The Warrants shall be exercisable initially at $1.85
per share of Series A Preferred Stock, subject to adjustment, and shall be
exercisable for a period of 5 years. In addition, at the option of the holder,
each Warrant is also immediately exercisable directly to acquire, instead of
shares of Series A Preferred Stock, shares of Common Stock on an
as-converted-from-Series-A-Preferred-Stock basis, whether or not the Series A
Preferred Stock is ever authorized or issued. Unexercised Warrants shall expire
earlier upon notice by the Company to the holders of the Warrants following any
consecutive 30-day trading period during which the Common Stock trades on its
principal market at a price at or above three (3) times the then applicable
exercise price with average daily volume of at least 100,000 shares (subject to
adjustment of such trading volume threshold in the event of stock splits,
reverse stock splits, stock dividends, recapitalizations or similar events).
16
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-QSB.
GENERAL
Electronic Game Card, Inc., is a supplier of innovative gaming devices to the
lottery and promotional industry worldwide. Our lead product is the EGC
GameCard, a revolutionary credit card-sized pocket game combining interactive
capability with "instant win" excitement. We had revenues $136,620 for the
period of this report and we incurred net losses of $622,612.
THE COMPANY
Electronic Game Card, Inc. (referred to as "EGC", "us", "we" or "Company") is a
supplier of innovative gaming devices to the lottery and promotional industry
worldwide. Our lead product is the EGC GameCard, a revolutionary credit
card-sized pocket game combining interactive capability with "instant win"
excitement. We design and supply an innovative "instant" win gaming device to
the lottery industry marketed under the name of Electronic GameCard. The shape
of a pocket game is approximately the size of a credit card and operated
electronically by touch incorporating a microchip and LCD screen showing numbers
or icons. Secondary markets with considerable potential for the Company's reward
based games products, e.g. the "GameCard", include the sales promotions
industry, in the area of prize and competition products, and the casino
industry. We design these devices to play game types, formats and prize
structures as required by our customers and are gradually building a range of
generic games of popularly recognized themes.
The EGC GameCard was designed by us to be rich in functionality, customizable,
extremely portable, and relatively inexpensive. Each EGC GameCard includes a
microprocessor, LCD, and long life power source, as well as state of the art
security features protecting both the consumer and the promoter. Our EGC
GameCard weighs in at just less than one half an ounce and is only 3mm thick. We
have two distinct markets for our GameCard product: the Lottery market and the
Sales Promotion market.
LOTTERY MARKET
Lottery operators currently make use of paper scratch cards to give players an
"instant" win or lose reward experience. Over the last several years, scratch
cards have become increasingly large and complex to accommodate consumer demand
for multiple plays and multiple chances to win. The EGC GameCard offers the
potential to simplify the scratchcard while giving the opportunity to raise the
unit price and increase sales. Our product has been seen by some leaders in the
lottery industry as potentially providing the next contemporary digital
evolution of the scratch card, offering multiple plays and multiple chances to
win in an entertaining and secure manner while using existing methods of
distribution as with scratchcards.
To access the lottery market in the most expeditious manner, we originally
signed an exclusive distributorship agreement with Scientific Games
International, Inc (NASDAQ:SGMS) in May 2003 who have long term relationships
with the majority of national and state lotteries on a worldwide basis. See
above in Sales and Marketing.
Following on from a successful product launch of the Electronic GameCards in
Iowa in October 2004 the relationship between EGC and Scientific Games
International evolved into a Joint Venture in an agreement signed on October
12th, 2004. Scientific Games is the largest printer and wholesaler of "instant"
win scratch cards to the worldwide lottery market and will now provide this
global distribution network for lottery products to the Joint Venture.
Scientific Games is in a unique position within this sector as they supply over
70% of the scratch card needs to the worldwide lottery market and, equally
important, is intimately involved in bringing new innovative products to the US
state lotteries.
17
<PAGE>
The Joint Venture agreement with Scientific Games resulted from the first
consumer launch of the EGC GameCards to the Iowa State lottery. The Iowa Lottery
Quarter Play GameCard was launched on the 4th October, 2004 and the Iowa lottery
and Scientific Games publicly stated that the results exceeded their
expectations of sales level and consumer reaction. The Iowa lottery placed a
re-order for a further 189,000 Quarter Play GameCards for delivery in April 2005
and has agreed to place orders for over 500,000 GameCards in total to be
delivered during 2005.
SALES PROMOTION MARKET
The sales promotion prize and competition market is one in which the promoter
(usually a well known brand) must not be seen to obtain money for entry and
where no purchase of the brand's goods is necessary in order not to fall under
the laws by which lotteries are regulated. Brand's make use of these prize and
competitions games as a means to implement loyalty and incentive programs. The
market for promotional items is large, newspapers, magazines and direct mail
solicitations offer rewards, frequently using scratchcards, coupons and other
forms of entry to engage consumers in promotional competitions. While our EGC
GameCards can be applied to a broad range of potential promotional
opportunities, we have focused our efforts initially on direct mail solutions.
Each EGC GameCard is developed by us with direct input from our clients on the
style and functionality of the card. During 2004 it appeared that the dialogue
with clients in regard to customizing games to a great degree was too time
consuming and only profitable in respect of large volume orders of over 250,000
GameCard units. Consequently a new strategy of storing parts of generic games so
as to be able to deliver smaller quantities more rapidly at greater cost
efficiency has been put in place as of April 2004. During 2004 EGC established
its Xogo brand name in the sales promotion market place and received many
hundreds of inquiries from well known brands, a number of which are still in
continuing discussion. The wholesale price of the GameCard is higher than the
cost of products traditionally used in Sales Promotion, such as key rings, pens,
cups and related promotional items. Also, in order to produce a tailor made
GameCard product for a customer take the Company approximately 14 to 16 weeks
from order to delivery. Other traditional promotional products require less than
half that time to process orders and deliver product. While pricing may vary
between promotional items based upon the actual item and the quantity ordered,
we currently offer only one promotional item, namely the GameCard, and the size
of the order does not provide comparable quantity discounts seen with other
promotional products. Accordingly, the Company's must convince potential
purchasers that the unique features and results of the GameCard justify the
higher cost and longer lead times, thereby making purchases of the GameCard as a
promotional item worthwhile. Since the pricing and delivery times of the
GameCards have caused potential customers to reconsider their purchase of our
products, our new product strategy is designed to address this concern in 2005.
Introducing a new product into the sales and promotion marketing arena, despite
its demand for novelty products and innovative ideas, takes time and
adaptability to market needs. Even so EGC feel that their substantial investment
to date in this market has been worthwhile in establishing a presence with many
well known brands and their agencies and that the interest shown in 2004 will
increase in 2005 so as to establish a foothold in this massive market place.
INDIAN GAMING MARKET
The Indian Gaming on Native American Tribal Lands covers parts of 28 States
within the United States of America and represents a significant portion of the
total gaming industry. Currently, we do not have an agreement with any Indian
Gaming or Native American Tribal Lands. However, the Company is preparing to
launch the GameCards to the 367 casino operations in Indian Country in 2005.
This market launch applies solely to the sale of GameCard as gaming devices sold
directly to the public in casinos and on reservations owed and operated by
Indian tribes.
The Indian Tribes often look to Gaming Laboratories, Inc. for certification and
classification of gaming devices. However, with respect to the GameCards, as
with instant scratch games, the GameCards do not rely on an electronic mechanism
to produces the result of the game and are therefore classified as Class ll
products.
The Company has received a legal opinion from the National Indian Gaming
Commission ("NIGC") that the EGC GameCard is a Class II devise under IGRA
(Indian Gaming Regulatory Act). The Class II designation is significant because
it exempts the Company from becoming subject to the state license procedures and
requirements. A copy of that June 24, 2005 opinion letter from the NIGC was
filed as Exhibit 99.1 to the Company's Form 10-KSB/A for the fiscal year ended
December 31, 2004, as amended on January ___, 2006.
18
<PAGE>
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
BUSINESS STRATEGY
The Company is now marketing the EGC GameCard to buyers and has a joint venture
with Scientific Games International, Inc., for the exclusive, global
distribution of EGC GameCard's to the lottery industry. We intend to establish
additional distribution agreements in the future to supplement the planned
growth of our own sales and marketing resources. A further sales opportunity is
now open to the company following approval of our product to by the NIGC.
We believe that we have the opportunity to become a leading business providing
an innovative gaming, platform technology servicing the sales promotion and
lottery markets in the next five years if we successfully execute our growth
strategy.
The XOGO multi-play GameCard is supported by the EGC Sales Marketing and Games
Design teams in the US and in Europe, who work with brands or agencies to
customize the many XOGO GameCard applications to each brand's individual goals.
The teams advise on the most appropriate means of promotion from the XOGO games
portfolio.
In addition to our current and planned sales team, we are also working closely
with strategic partners to distribute our products. We typically enter into
exclusive contracts with our strategic partners for a specific market and
geography.
RESULTS OF OPERATIONS
The company recorded revenues of $136,620 which initial orders from the Iowa
State lottery. Sales and Marketing costs were $292,048 compared with $180,361 in
the comparable period for 2004 the increase was due to additional activity and
resources employed in developing a market for the Gamecard. General and
Administration $84,636 compared with $247,527 this expense was reduced compared
with the comparable period which included non recurring start up costs.
Consultancy costs were $268,373 compared with $349,780. Slightly lower use of
consultants in the period but consultants will continue to be used in
development of markets and product. Operating loss was reduced to $622,612
compared with $697,418 for the comparable period in 2004. Operating losses are
expected to reduce as revenues from lottery and other sales increase.
Revenues are expected to increase as we have now received repeat orders from our
first State lottery customer and we do not anticipate significant increases in
operating costs relative to sales.
FINANCIAL RESOURCES
On April 5, 2005 the company sold $8,666,000 gross, $7,911,200 net, of its
convertible promissory notes (the "Convertible Promissory Notes") to accredited
investors in a private placement of securities (the "Private Placement"). Each
$48,000 principal amount of a Convertible Promissory Note will automatically
convert into 32,000 shares of the Registrant's Series A Convertible Preferred
Stock, par value $0.001 per share (the "Series A Preferred Stock"). Each share
of the Series A Preferred Stock is initially convertible into one (1) share of
the Registrant's common stock, par value $0.001 per share (the "Common Stock"),
which equates to an initial conversion price of $1.50 per share of Common Stock.
Also, the Company issued one (1) warrant (a "Warrant") to acquire one (1) share
of Series A Preferred Stock for every two shares of Series A Preferred into
which the Convertible Promissory Notes are initially convertible. The Warrants
shall be exercisable to acquire shares of Series A Preferred Stock upon the
effectiveness of actions by the Registrant's shareholders to authorize the
Series A Preferred Stock. The Warrants shall be exercisable initially at $1.85
per share of Series A Preferred Stock, subject to adjustment, and shall be
exercisable for a period of 5 years.
19
<PAGE>
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
to the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified by the Commission's rules and forms, and that information
is accumulated and communicated to our management, including our Chief Executive
Officer (or Acting Chief Executive Officer, as the case may be) and our Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. The effectiveness of our disclosure controls and procedures is
subject to certain limitations, including the exercise of judgment in designing,
implementing and evaluating the controls and procedures, the assumptions used in
identifying the likelihood of future events, and the inability to eliminate
errors or misconduct completely. As a result, there can be no assurance that our
disclosure controls and procedures will detect all errors or fraud. By their
nature, any system of internal control, including our system, can provide only
reasonable assurance regarding management's control objectives.
Under the supervision and with the participation of our Chief Executive Officer
(or Acting Chief Executive Officer, as the case may be) and our Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of March 31, 2005, the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
(or Acting Chief Executive Officer, as the case may be) and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of March 31, 2005.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in the Company's internal controls over financial
reporting, that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially effect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On April 6, 2005, the Registrant completed a second and final closing of its
offering of convertible promissory notes (the "Convertible Promissory Notes") to
accredited investors in a private placement of securities (the "Private
Placement") previously reported on the Registrant's Current Report on Form 8-K
filed on March 31, 2005 (the "March 31, 2005 8-K"). The Registrant sold an
additional $248,000 Convertible Promissory Notes in the final closing on April
6, 2005, making a total of $8,666,000 Convertible Promissory Notes sold, in the
aggregate, in the Private Placement. The March 31, 2005 8-K, including the
Exhibits filed with it, is specifically incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 22, 2005, via written consent, 13,248,825 shares of the total
outstanding shares of 25,468,439 or approximately 52% of the Company's Common
Stock, as of March 15, 2005, approved an amendment to the Company's Articles of
Incorporation to create and establish 10,000,000 shares of Series A Convertible
Preferred Stock, par value $.001.
The authorization of the 10,000,000 shares of Series A Convertible Preferred
Stock will allow the Company to fulfill the terms of a private placement. The
Company sold a total of $8,666,000 of Convertible Promissory Notes, and each
$48,000 of Notes automatically converts initially into 32,000 shares of Series A
Convertible Preferred Stock, par value $.001 or if the investor chooses,
directly into shares of the Company's Common Stock.
The amendment has not become effective.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included as part of this report:
Exhibit
Number Title of Document
------- ------------------------------------------------------------------
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K filed.
Form 8-K filed with the Commission on March 31, 2005 regarding the Company's
sale of $8,418,000 of convertible promissory notes to accredited investors in a
private placement.
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
ELECTRONIC GAME CARD
DATE: FEBRUARY 3, 2006 BY: /S/ LEE COLE
--------------------------------
LEE COLE
ACTING PRESIDENT AND ACTING CHIEF
EXECUTIVE OFFICER
DATE: FEBRUARY 3, 2006 BY: /S/ LINDEN BOYNE
--------------------------------
LINDEN BOYNE
SECRETARY / TREASURER
(PRINCIPAL FINANCIAL OFFICER)
22
