UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
| x | ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 000-25853
ELECTRONIC GAME CARD, INC
(Name of small registrant in its charter)
| NEVADA | 87-0570975 |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
318 N Carson Street, Suite 208
Carson City NV 89701
(1-888-341-3421)
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
| Title of each class | | Name of each exchange on which registered |
| None | | None |
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has 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 o
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company x |
| | | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting stock held by non-affiliates computed by reference to the last price at which the stock was sold, as of March 12, 2009, was $19,712,314. The aggregate estimated market value was determined by multiplying the approximate number of shares of voting stock 52,566,170 held by non-affiliates by the closing price of such stock $0.375, as of March 12, 2009, as quoted on the OTCBB by the National Association of Securities Dealers (the "NASD").
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 57,109,428 at March 16, 2009.
TABLE OF CONTENTS
| | | | Page |
| | | | Numbers |
| | | | |
| PART I | | | |
| | ITEM 1 | Description of Business | 3 |
| | ITEM 2 | Description of Property | 7 |
| | ITEM 3 | Legal Proceedings | 7 |
| | ITEM 4 | Submission of Matters to a Vote of Security Holders | 7 |
| PART II | | | |
| | ITEM 5 | Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities | 7 |
| | ITEM 6 | Management’s Discussion and Analysis | 9 |
| | ITEM 7 | Financial Statements | 17 |
| | ITEM 8 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 17 |
| | ITEM 8A | Controls and Procedures | 17 |
| | ITEM 8B | Other Information | 18 |
| | | | |
| PART III | | | |
| | ITEM 9 | Directors and Executive Officers of the Registrant | 18 |
| | ITEM 10 | Executive Compensation | 21 |
| | ITEM 11 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 21 |
| | ITEM 12 | Certain Relationships and Related Transactions | 22 |
| | ITEM 13 | Principal Accountant Fees and Services | 22 |
| | | | |
| PART IV | | | |
| | ITEM 14 | Exhibits and Financial Statement Schedules | 22 |
FORWARD LOOKING STATEMENTS
Some of the statements in this report constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our industry's results, levels of activity, performance or achievements to be significantly different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by the use of the words "may," "will," "should," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of those terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievements. We do not assume responsibility for the accuracy and completeness of the forward-looking statements. We do not intend to update any of the forward-looking statements after the date of this report to conform them to actual results.
WHERE YOU CAN FIND MORE INFORMATION
As a public company, we are required to file annually, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any of our materials on file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Our filings are available to the public over the Internet at the SEC's website at http:\\www.sec.gov. Please call the SEC at 1-800-732-0330 for further information on the Public Reference Room. We also provide copies of our Forms 8-K, 10-K 10-Q, Proxy Statement and Annual Report at no charge to investors upon request .
PART I
DESCRIPTION OF THE BUSINESS
Electronic Game Card, Inc. (referred to as "EGC", "us", "we" or "Company") is a designer and manufacturer of an innovative "instant" win, extended play gaming device using patent protected technology. It was originally conceived for the global sales promotion and lottery industries and marketed under the name of EGC Electronic GameCard™ referred to as “GameCard”. The shape of a pocket GameCard is flexible to clients’ needs but is currently approximately the size of a credit card, operated electronically by touch and incorporating a microchip and LCD screen showing numbers or icons. Additional markets with considerable potential for the Company's reward based games products are Indian Gaming, general gaming outlets like bingo halls and casinos and private and social lotteries. The Company now refers to and is structured around three key markets Promotions, Gaming and Education. We design our GameCards to play game types, formats and prize structures as required by our customers and are building a software library of generic game formats of popular, widely recognized and understood themes.
The GameCard is a product and game technology platform that has been designed to be versatile and flexible in functionality, design, brand customizable, portable, and cost efficient in its potential markets. A GameCard also include a random number generator and state of the art security features protecting both the consumer and the promoter for the game focused products, especially those for lotteries, gaming and sales promotions. On February 20, 2008, we announced that the Security features of the GameCard had recently been tested and verified by Gaming Laboratories International, Inc as being very high. The product is the only Electronic GameCard tested and verified by them. The standard GameCard weighs less than one half an ounce and is 3mm thick. In order to increase sales in the gaming area of Native American Gaming the Company received the permission from the National Indian Gaming Council under Class II usage on June 24, 2005 to market the GameCard as both a promotional and revenue product.
The Company has applied for patent protection for the GameCard in the United States and internationally and have to date obtained authorization from the US patent office which allows preventative legal action to be taken against any potential imitators. The international searches associated with the process of examining the Company’s patent applications continue and these searches, when complete, allow us to enter the next phase of the process for being granted a patent by the examiners in various jurisdictions. There is no fixed time period for the completion of the searches and the patent claims since territories are not similar and the completion of a patent search in one territory is not an indicator of the outcome of other patent searches in another territory. The company continues to work closely with our patent attorneys to ensure that we are applying the maximum resources to be granted the widest possible patent protection in all applicable jurisdictions as soon as possible. In 2008 the Company was successfully awarded two patents covering the European Economic Community and Japan. While this process continues the Company’s patent attorneys are instructed to identify and prosecute any patent application that could infringe the claims the Company has applied for in its patent applications for the GameCard.
The Company owns 100% of the share capital of Electronic Game Card, Ltd., a company incorporated under the laws of England, through its wholly owned U.S. subsidiary Electronic Game Card Marketing, Inc. (Delaware). Electronic Game Card Marketing Inc., is the marketing and sales operating division of Electronic Game Card Inc. in the USA which also owns and operates Electronic Game Card Marketing Ltd, as the UK and European marketing and sales division.
Corporate History
The Fence Post Inc (Fence) was organized on June 26, 1981, under the laws of the State of Utah. Fence initially engaged in the business of operating a retail basket shop and, from the time of its inception, has undergone several name changes and business changes. In 1986, the company changed its name to Dynamic Video, Inc (Dynamic) and on November 12, 1986, it commenced a public offering of an aggregate of 3,250,000 shares (pre-split) of common stock at a price of two cents ($.02) per share. The offering was made pursuant to the exemption from registration provided by Section 3(a)(11) of the Securities Act of 1933, as amended (the "1933 Act"), and according to the registration provisions of Section 61-1-10 of the Utah Uniform Securities Act. Dynamic then became engaged in the business of operating a video rental store. However, the venture proved unsuccessful and the business closed.
In April 1988, Dynamic acquired all, 10,000 shares, of the issued and outstanding common stock of Loki Holding Corp. (LHC) in exchange for 1,000,000 shares (pre-split) of the Dynamic's authorized but previously unissued common stock. In September 1988, the Dynamic changed its name to Loki Holding Corporation (Loki). In October 1989, Loki acquired an additional 52,500 shares of LHC common stock for the cash consideration of $3,150. Following the unsuccessful video store venture, Loki's Board of Directors resolved to distribute its shares of LHC common stock to Loki's shareholders as a partial liquidating dividend, in the ratio of one (1) share of LHC common stock for each ten (10) shares of Loki's common stock held as of May 25, 1990.
On September 11, 1990, Loki changed its name to Interactive Development Applications, Inc. (Interactive). However, Interactive never effectuated its business plan of computer software development and the company was involuntarily dissolved on May 1, 1997 by the State of Utah. On September 4, 1997, the State of Utah entered an Order that an annual meeting of Interactive’s shareholders be held. The sole purpose of the meeting was to elect, from persons to be nominated at the meeting, three directors to serve until the next annual meeting of shareholders or until their successors are elected (or appointed) and qualified. On October 23, 1997, Interactive was reinstated in the State of Utah.
On October 24, 1997, the Board of Directors resolved to call for a special meeting of shareholders for November 7, 1997, at which meeting the company's shareholders approved the following resolutions: (a) to amend the Company's Articles of Incorporation to (i) change the corporate name to Quazon Corp., (ii) increase the authorized capital of the company from 50,000,000 shares of common stock to 100,000,000 shares of common stock, and (iii) decrease the par value of the Company's common stock from $0.02 per share to $0.001 per share, with appropriate adjustments in the stated capital and additional paid in capital accounts of the company; (b) to effect a reverse of the Company's outstanding common stock on a one (1) share for two hundred fifty (250) shares basis, with the provision that no shareholder's holdings be reduced below 100 shares as a result of such reverse split; and (c) to change the domicile of the company from the State of Utah to the State of Nevada. Shareholders also approved the issuance of 7,000,000 shares of the Company's authorized, but previously unissued common stock, adjusted to reflect the 250 shares for one share reverse split, to the Company's then President. The shares were in consideration for services rendered to the company in connection with bringing the Company's status current with the State of Utah and for the payment to the company of $5,000.
On November 14, 1997, Quazon Corp filed with the State of Nevada Articles of Merger whereby the Company was merged with and into Quazon Corp., a newly formed Nevada corporation Quazon-Nevada (QN), for the sole purpose of changing the Company's domicile from the State of Utah to the State of Nevada. Each outstanding share of the company's common stock was exchanged for one share of common stock of QN. Accordingly, the Utah corporate entity was merged out of existence and QN survived the merger and succeeded to the assets, liability, and agreements of the Utah entity. Since October 1997, the company was actively seeking potential operating business opportunities with the intent to acquire or merge with such businesses. At that point the company had only nominal assets and no operating history.
On June 6, 2001, Scientific Energy, Inc, a Corporation organized under the laws of the State of Utah on May 30, 2001, and Quazon, Corp., entered into an agreement and plan of reorganization. Pursuant to the agreement, Scientific Energy, Inc. UT acquired 20,000,000 shares of Quazon Corp stock in exchange for 100% of the issued and outstanding shares of Scientific Energy UT.
Scientific Energy, Inc. entered into a Share Exchange dated November 19, 2003 with Electronic Game Card, Inc. (EGC), a Delaware Corporation having a principal place of business in New York City, New York. This transaction closed on December 5, 2003 whereby Scientific Energy, Inc. reverse split its existing and issued outstanding shares on a 100:1 basis. It then issued 12,696,595 new shares, constituting approximately 92% of the issued and outstanding common stock of the company, to the shareholders of EGC and EGC became a wholly owned operating subsidiary. The acquisition of EGC was considered to be a reverse merger and EGC was the accounting acquirer.
On December 5, 2003 the Scientific Energy, Inc. changed its name to Electronic Game Card, Inc. (the Company), with Electronic Game Card, Inc. Delaware changing its name to Electronic Game Card Marketing, Inc. a Delaware corporation.
Government Regulations
The Company operates within the sales promotions, Federal and State lottery and gaming sectors and Native Indian markets which are regulated by various statutes. Within all the Company’s international markets and trading areas there are also various regulatory details and statutes enforced on operators and promoters by national, state, county and local authorities. The Company sells complete lottery EGC Electronic GameCards™ wholesale to approved agencies and other licensed lottery promoters, providers, and retailers. The promoters, providers, and retailers for the distribution and sale of lottery products to the public are highly regulated. The Company also permits licencees in the sales promotion sector to manufacture, distribute and sell its products in strictly defined market sectors and geographic regions. However these licensee must meet the production, security (GLI) and reliability criteria and standards as contracted by the company, provide independent quality assurance and allow for random test by EGC to protect the quality standards which the Company has invested resources and revenue to achieve.
EGC Electronic GameCard™ production and manufacture is required to comply with the various regulations and statutes and within these limitations can then be adapted to meet specific customer applications and designs. While it is necessary for the Company to be aware of and consider these statutes and regulations, the technical standards and other legal requirements are provided to the Company by its customers. The Company itself is not subject to the rigorous regulation and control applied to licensed lottery operators and retailers. The Company’s GameCards will only be supplied in accordance with applicable regulations. The regulations required by responsible government agencies and departments are specified to us by the purchaser. As a supplier to the lottery industry, the Company does not handle any public funds or does it have any responsibility beyond providing the pre-specified technically compliant product, the specifications for which will be set by the jurisdiction in which the purchaser operates.
While we are aware of some current regulatory provisions in some of our customers’ markets and our technical department takes those regulations into consideration during development, we produce our product pursuant to our customers’ requests. Should any product fail to meet regulatory requirements, the responsibility for such a failure will fall on our customers. We do not guarantee government regulatory compliance of our products.
In the United States, legislation, operational detail and management regulation of state lotteries is not subject to federal control. Each state government establishes its own laws and regulations regarding its own lottery. States determine the use of funds generated by that state’s lottery and to a lesser extend Federal agencies, regulate how and where lottery tickets may be sold, by whom and the ages of sellers and purchasers of a lottery ticket. The laws and applicable approval processes for lottery cards must be conducted on a state by state or government agency by government agency basis. In each instance, the process must be satisfied by the lottery operator, our customer, and not by the company.
In some jurisdictions the gaming or lottery commissions may approve every new lottery product or game price point. In other jurisdictions, the commissions may be limited to recommending price points with final approval by the Governor or Government Minister. The level of flexibility and discretion in regulatory detail in choosing and pricing a new lottery product is subject to statutes and is distinct to each new market approached by our customers for the introduction of the GameCard.
We understand that the regulations regarding charitable lotteries and charity gaming represent yet another compliance environment. Charitable lotteries may be subject to gaming legislations or statutory schemes designed for charities that permit them to maximize revenue. Again, charitable lotteries regulations vary from state to state, as well as nation to nation. As previously mentioned our customers are the entities regulated by these statutes and we provide our GameCard product to them based on their specifications.
The regulations outlined above differ from the approval of the National Indian Gaming Council (“NIGC”) for our GameCard as a Class II gaming product. The NIGC process for approval for the Indian Gaming market in the United States is a Federal Government and local approval process. The federal approval of the GameCard product by the NIGC applies to all Indian gaming operations in the United States. Upon federal approval, individual Indian gaming operations operate their own approval process for new products. Local Indian gaming approval is subject to the local tribe’s administrative system. Approval can be extremely formal with a detailed review and process or it may controlled by tribal committees. However, as noted elsewhere, approval by the federal government, by the NIGC and the local tribes the responsibility of our customers, not us.
For sales promotions and free to enter draws that are not within a gaming operation the regulatory framework varies market to market. Requirements range from stringent to lenient and are controlled by agencies as diverse as town councils and national governing bodies, including self regulating organizations. Self regulating bodies are created by an industry to regulate promotions and marketing within that industry. These national bodies have the ability, usually through extensive membership, to prohibit promotions, promotions techniques or promotions mechanics. If the body believes that the process or product will be detrimental to the promotion and marketing of the industry and alienate the public and bring the industry into disrepute, the body will prohibit use by the member. These self regulated organizations operate to ensure long term viability of the industry and to prevent the need for governmental intervention. Therefore these trade bodies aggressively maintain their standards to ensure their independence, while still operating within a regulatory structure, for the benefit of its members and the industry.
Our GameCard replicates existing game play patterns found in established promotions, and gaming mechanics, all of which have already been specified, licensed and/or approved by trade bodies. Therefore we believe that the impact of government regulations, existing or probable, on our products will be minimal. However, we do not intend to be complacent. We will work with regulators, joint venture associates, agents, trade bodies and customers in an effort to minimize the impact of existing and potential governmental regulation on the Company’s products. We are unable to predict any changes that may occur in Federal or State laws regulating gaming. With the growth of State Lotteries, multi-state lotteries, Indian Gaming and gaming in general, we expect that further more stringent regulations will be adopted by various governments. We cannot guarantee that we will be able to satisfactorily respond to each change in specifications placed upon our customers by new regulations. We do not believe that new regulations will be universally and quickly adopted so as to affect, or eliminate, all our potential markets. However, we have absolutely no control over the regulating entities, whether governmental, tribal, local or private. Should gaming and sales promotions activities be prohibited in any jurisdiction, such prohibition would eliminate that market completely.
While the Company is not subject to the direct supervision or jurisdiction of any state, the Company’s customers may be subject to the control of any number of states and their respective gaming commissions, gaming control boards, division of gaming enforcement, gaming control boards, and other gaming authority. The following is a brief discussion of some state regulations to which the Company’s customers could be subject. The following discussions primarily address casino licensees. However, they are generally indicative of the level of regulation one could expect when entering state regulated “gaming markets.”
Research and Development
The company continues to focus on Research and Development projects in order to continually improve the performance and security levels of the GameCard, extend the Company product portfolio and the international intellectual property portfolio. The recent success of the GameCard testing with Gaming Laboratories International is a direct result of exhaustive R&D into product enhancement and has led to a more robust and reliable product Additionally our extensive R & D projects allow us to identify, devise and deliver increasingly relevant and attractive game formats for our various target market R& D will continue to play a major role throughout 2009 and beyond as the company maintains its commitment to devising and manufacturing new game formats and platforms. During fiscal 2008 and 2007, we spent $134,700 and $165,000 respectively, on research and development.
Competition
The Company takes technology competition seriously and though it is aware of the threat believe the protection sort though institutional knowledge and international intellectual property filings provide distinct barriers to entry for direct competition. The management believes that there are currently no “directly comparable products” which compete with the GameCard™ in the gaming or promotions markets or have approval from Federal, State or international independent security approval organization. Therefore, the Company’s management believes that it does not face any direct competition for its products across its developed or developing markets. However, our product is complementary to, and could substitute for the paper scratch card used extensively in the lottery and sales promotion markets. These are produced and sold by many companies in many countries. The paper scratch cards represent competition in the “instant win tickets” gaming market, but are distinctly dissimilar to the GameCard in technology and unique in the extended play appeal to players. Nevertheless, if any of the companies in the scratch card segment of this business were to develop an electronic product, they would become direct competitors. Furthermore, some of these competitors have substantially greater financial, scientific, and human resources than the Company, and as a result they have greater research and development and marketing capabilities that we do. Should they enter the market, these competitors may then create a significant negative impact on our overall financial results. The development of products for the education sector are carefully planned to ensure that the company’s entry is in a manner that use the technology and institutional knowledge in a manner that provide the Company with the greatest strategic advantage and develops a product with a number of Unique selling points of technology, functionality at a price that would challenge competitive entry.
Employees
As of December 31, 2008, we had ten (10) employees, all of whom were full time. At December 31, 2007, we had six (6) employees, all of whom were full time.
Gaming Market
Gaming operators like Casinos and lotteries 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 GameCard offers the potential to simplify the scratch card 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 scratch cards.
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. The Company has received a legal opinion from the National Indian Gaming Commission (“NIGC”) that the Electronic 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.
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 is necessary. In order not to fall under the laws by which lotteries are regulated our Electronic GameCards™ can be applied to a broad range of potential promotional opportunities.
Education Market
2008 has seen the continual development of the Educational product portfolio. The Company has developed games for children that encourage development matching skills, animal name recognition and math skills including multiplication, subtraction and addition. The games including customized software and hardware which include the licensing of highly popular Children’s Television characters. This strategy of character based products provides additional leverage for gaining distributors and retail outlets. The Company is creating a range of generic software games for the Educational market that have customizable graphics, allowing the Company to sell this games globally regardless of television characters. The Company is also developing general knowledge products including hardware and software that engage with all markets and an associated on line activity.
| ITEM 2. | DESCRIPTION OF PROPERTY |
The Company owns no real estate and currently rents from the offices in London and Carson City rented on a month by month basis. The rent in the London office from January 1, 2008 to December 31, 2008 was $4,275 per month.
| ITEM 3. | LEGAL PROCEEDINGS |
The Company is not a party to any lawsuit.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None
PART II
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The company trades on the OTC Bulletin Board under the symbol EGMI. As of December 31, 2008, the Company had approximately 320 shareholders of record.
The following table represents the range of the high and low bid prices of the Company's stock as reported by the OTC Bulletin Board Historical Data Service. These quotations represent prices between dealers and may not include retail markups, markdowns, or commissions and may not necessarily represent actual transactions. The Company cannot ensure that an active public market will develop in its common stock or that a shareholder may be able to liquidate his investment without considerable delay, if at all.
| Year | | Quarter Ended | | High $ | | | Low $ | |
| | | | | | | | | |
| 2006 | | March 31 | | | 0.18 | | | | 0.17 | |
| | | June 30 | | | 0.31 | | | | 0.31 | |
| | | September 30 | | | 0.30 | | | | 0.30 | |
| | | | | | | | | | | |
| | | December 31 | | | 0.18 | | | | 0.16 | |
| 2007 | | March 31 | | | 0.25 | | | | 0.15 | |
| | | June 30 | | | 0.45 | | | | 0.22 | |
| | | September 30 | | | 0.74 | | | | 0.29 | |
| | | December 31 | | | 0.9 | | | | 0.57 | |
| 2008 | | March 31 | | | 0.67 | | | | 0.35 | |
| | | June 30 | | | 0.80 | | | | 0.41 | |
| | | September 30 | | | 0.83 | | | | 0.47 | |
| | | December 31 | | | 0.57 | | | | 0.24 | |
The Company shares are subject to section 15(g) and rule 15g-9 of the Securities and Exchange Act, commonly referred to as the "penny stock" rule. The rule defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rule provides that any equity security is considered to be a penny stock unless that security is; registered and traded on a national securities exchange meeting specified criteria set by the SEC; authorized for quotation from the NASDAQ stock market; issued by a registered investment company; excluded from the definition on the basis of price at least $5.00 per share or the issuer's net tangible assets. The Company's shares are deemed to be penny stock, trading in the shares will be subject to additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse, and certain institutional investors.
For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for the transaction involving a penny stock, other rules apply. Consequently, these rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock and may affect the ability of shareholders to sell their shares.
The Company has not declared any cash dividends on its Common Stock since inception and its Board of Directors has no present intention of declaring any dividends. For the foreseeable future, the Company intends to retain all earnings, if any, for use in the development and expansion of its business.
Recent Sales of Unregistered Securities
The following reflects issuance of our restricted common stock during the two years ended December 31, 2008 and December 31, 2007:
For the year ended December 31, 2007
| | · | 816,269 shares of common stock issued related to the conversion of Series A Convertible Redeemable Preferred Stock. |
| | · | 2,889,399 shares of common stock issued for investments. |
| | · | 137,500 shares of common stock issued for consulting services. |
For the year ended December 31, 2008
| | · | 3,874,343 shares of common stock issued related to the conversion of Series A Convertible Redeemable Preferred Stock. |
| | · | 3,045,125 shares of common stock issued for investments. |
| | · | 440,000 shares of common stock issued for consulting services. |
| | · | 1,766,342 shares of common stock issued related to the exercise of options. |
All of the shares listed were issued in private placements and no brokers or underwriters were used or compensation paid. All shares listed above are shares of common stock of the Company and are subject to standard Section 4(2) resale restrictions. These shares were sold solely to investors who were able to and adequately demonstrated, by completing an Investor Questionnaire and Subscription Agreement. This class of persons (including entities) qualified as accredited investors. Additionally, each investor was provided with a package of information that adequately described the Company and disclosed all relevant information.
On January, 1, 2007, the Company adopted and instituted The 2007 Equity Compensation Plan (the “2007 Plan”) which is further described below. The 2007 Plan provides for options to be issued to the Company’s officers, key employees, consultants and advisors. These options and the shares of common stock to be issued upon exercise of the options were issued by the Company without the use of any underwriters or brokers. The options and shares described in the information regarding the 2007 Plan below were issued under the exemption for registration set forth in Section 4(2) of the Securities Act of 1933 and are subject to Section 4(2) restrictions. These options, and the shares when the options were or are exercised, were issued solely to key employees who have intimate working knowledge of the Company, its operations and its financial condition, each of whom demonstrated their qualifications as an accredited investor. Each employee/investor has access to all relevant Company information.
During the year ended December 31, 2007, the Company issued 2,000,000 options pursuant to the 2007 Equity Compensation Plan exercisable at $0.175 per share and 2,000,000 options pursuant to the Equity Compensation Plan exercisable at $0.25 per share.
During the year ended December 31, 2008, the Company instituted the 2008 Equity Compensation Plan and issued 3,500,000 options to the new board members at $0.52.
SECURITIES AUTHORIZED TO BE ISSUED UNDER EQUITY COMPENSATION PLAN
| Plan Category | | Number of Securities to be issued Upon Exercise of Outstanding Options Warrants and Rights (a) | | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) | |
| | | | | | | | | |
| Equity compensation plans | | | 2,000,000 | | | $ | 0.175 | |
| Approved by Security | | | 2,000,000 | | | $ | 0.25 | |
| Holders | | | 3,500,000 | | | $ | 0.52 | |
| ITEM 6. | MANAGEMENT'S DISCUSSION AND ANALYSIS |
General
Some of the statements contained in this Annual Report on Form 10-K, which are not purely historical, may contain forward-looking statements including, but not limited to, statements regarding the Company’s objectives, expectations, hopes, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by the use of the words “may,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of those terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, our actual results could differ materially from those disclosed in these statements due to various risk factors and uncertainties affecting our business, including those detailed in the “Risk Factors” section. We caution you not to place undue reliance on these forward-looking statements. We do not intend to update any of the forward-looking statements after the date of this report to conform them to actual results. You should read the following discussion in conjunction with our financial statements and related notes included elsewhere in this report.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Marketable Securities
We account for our investments in equity securities with readily determinable fair values that are not accounted for under the equity method of accounting under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). Management determines the appropriate classification of such securities at the time of purchase and re-evaluates such classification as of each balance sheet date. Restricted securities are valued at the quoted market bid price and discounted for the required holding period until the securities can be liquidated. We classify our marketable securities as available-for-sale under SFAS 115. The specific identification method is used to determine the cost basis of securities disposed of. Available-for-sale securities with quoted market prices are adjusted to their fair value. Any change in fair value during the period is excluded from earnings and recorded, net of tax, as a component of accumulated other comprehensive income (loss). Any decline in value of available-for-sale securities below cost that is considered to be “other than temporary” is recorded as a reduction of the cost basis of the security and is included in the statement of operations as an impairment loss.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on specific identification of customer accounts and our best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. We evaluate the collectibility of our receivables at least quarterly. The allowance for doubtful accounts is subject to estimates based on the historical actual costs of bad debt experienced, total accounts receivable amounts, age of accounts receivable and any knowledge of the customers’ ability or inability to pay outstanding balances. If the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required. The differences could be material and could significantly impact our cash flows from operating activities.
Software Development Costs
Costs incurred to develop computer software products to be sold or otherwise marketed are charged to expense until technological feasibility of the product has been established. Once technological feasibility has been established, computer software development costs (consisting primarily of internal labor costs) are capitalized and reported at the lower of amortized cost or estimated realizable value. Purchased software development is recorded at its estimated fair market value. When a product is ready for general release, its capitalized costs are amortized using the straight-line method over a period of three years. If the future market viability of a software product is less than anticipated, impairment of the related unamortized development costs could occur, which could significantly impact our recorded net income/loss.
Intangible Assets
SFAS 142, “Goodwill and Other Intangible Assets,” addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in the financial statements upon their acquisition and after they have been initially recognized in the financial statements. SFAS 142 requires that goodwill and intangible assets that have indefinite useful lives not be amortized but rather be tested at least annually for impairment, and intangible assets that have finite useful lives be amortized over their useful lives. In addition, SFAS 142 expands the disclosure requirements about goodwill and other intangible assets in the years subsequent to their acquisition. SFAS 142 provides specific guidance for testing goodwill and intangible assets that will not be amortized for impairment. Goodwill will be subject to impairment reviews by applying a fair-value-based test at the reporting unit level, which generally represents operations one level below the segments we report. An impairment loss will be recorded for any goodwill that is determined to be impaired. We perform impairment testing on all existing goodwill at least annually. If the actual fair value of the reporting unit is less than estimated, impairment of the related goodwill could occur, which could significantly impact our recorded net income/loss.
Long-Lived Assets
Our management assesses the recoverability of long-lived assets by determining whether the depreciation and amortization of long-lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment, if any, is measured based on fair value and is charged to operations in the period in which long-lived asset impairment is determined by management. If the actual fair value of the long-lived assets are less than estimated, impairment of the related asset could occur, which could significantly impact the recorded net income/loss of the Company.
Revenue Recognition
Generally, revenue from product sales, net of estimated provisions, is recognized when the merchandise is shipped to an unrelated third party, as provided in Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" (SAB104"). Accordingly, revenue is recognized when all four of the following criteria are met:
| | · | persuasive evidence that an arrangement exists; |
| | · | delivery of the products have occurred; |
| | · | the selling price is both fixed and determinable; |
| | · | collectibility is reasonably probable. |
The Company’s typical sources of revenue are as follows–
| 1. | When a customer order has been manufactured and is ready for delivery to the customer FOB shipping as the company may specify. |
| 2. | When a customer has made a royalty payment under the terms of a distribution agreement. |
| 3. | When a contracted payment is due under any agreement. |
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 (“SFAS 109”), “Accounting for Income Taxes.” Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. Deferred taxation is provided in full in respect of taxation deferred by timing differences between the treatment of certain items for taxation and accounting purposes.
Company Overview
Electronic Game Card, Inc. (referred to as "EGC", "us", "we" or "Company") is a supplier of innovative games to the gaming, promotional and educationals and sectors worldwide. Our lead product is the EGC Electronic GameCard™(GameCard), a proprietary credit card-sized pocket game combining interactive capability with "instant win" excitement
Electronic Game Card, Inc (EGC) is an emerging international corporation developing reward based games for the sales promotions, casino and lottery and incentive markets. EGC’s core product is the GameCard™, a unique and innovative proprietary technology adapted to a platform, it has patents pending worldwide and with the technology that can be adapted to other markets. The GameCard platform is currently embedded in a credit card size digital device with an LCD window, touch pad controls and microchip, allowing for many game formats to be programmed to suit a variety of applications in several industry sectors.
EGC’s GameCards are used in the sales promotion market as an incentive or loyalty sales promotion tool to be given away by the brand promoter to the consumer with prizes given as rewards for winning simple fun games designed specially for the brand. The Jack Meyers Media Business Report states that the global media market for 2009 is $695 billion of which sales promotion and consumer incentives are $134 billion.www.jackmyers.com
Plan of Operations
During 2008 the Company expanded its volume production of the Electronic GameCards™. This necessitated the cost effective and secure design of GameCards from the manufacturers, involving high level quality control. to meet the standards required of our gaming customers.. The Company marketed the Electronic GameCard™ during 2008 in conjunction with distributors and direct sales in North America and Europe. Staff is responsible for either selling the GameCards direct or through distributors in specific market sectors and geographic areas. Our management team has relevant experience in their appropriate markets to contract agents and distributors to sell and increase distribution of our products.
Currently we have distributors in the Native American Indian casino and gaming field, State and National lotteries in the United States, Canada, Mexico and Italy, Charity lotteries and gaming in the European Union, Educational products in the UK ,Spain and Germany and Sports Promotions in the European Union.
Indian Gaming relates solely to the sale of GameCards as gaming devices directly to the public in casinos and reservations owned and operated by Native Indian Tribes in the USA. The Company has received Class II classification for its products from the National Indian Gaming Council (NIGC). National Indian Gaming Association states that in 2006 Tribal Governments gaming revenue was $25.7 billion dollars
www.indiangaming.org/library/indian-gamingfacts/index.shtml
Product Development
The company has a continuous program of product development comprising improvement of existing designs and additions to the suite of games currently on offer to clients. Game design is divided into four stages: concept development, software, testing and finally manufacturing. Product development and improvement is generated by in house review and response to specific customer recommendations.
The physical design of the GameCard has been enhanced through modifications to circuit design, leading to a more robust product. Independent Quality Assurance testing from our most recent manufacturing runs indicates that we are now producing our most reliable product to date. Performance is constantly being reviewed to improve the GameCard still further. In addition to improved circuit design we are currently upgrading the MCU Body (chip) on a number of our games. This will further improve reliability.
The GameCard has recently passed a series of stringent tests by Gaming Laboratories Inc (GLI), one of the most respected testing houses in the global gaming industry. These tests proved the GameCard’s ability to resist attempts at manipulating the IC logic or otherwise breaching the numerous security measures incorporated in the GameCard. This formal endorsement by GLI of the GameCard’s effective security defenses demonstrates the company’s continuing commitment to product development and security.
Other gaming concepts, which continue to push the boundaries of the GameCard performance and functionality, such as a US Bingo style game and multi-outcome games are constantly being devised and developed. The company has continued to develop the game concepts announced last quarter aimed at our target markets in Childrens’ Education and Sports promotions.
We are now able to offer customers a choice from our library of 32 games most of which can be personalized to their specific design requirements
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The Company generated revenues of $10,648,595 for the year ended December 31, 2008 compared with $6,038,058 for the year to December 31, 2007. The company has continued to expand its business with existing customers and has, through a number of distribution agreements, increased sales in the UK and Europe.
Cost of sales increased $1,075,836 or 72% from $1,474,311 for the year ended December 31, 2007 to 2,550,147 for the year ended 2008.
Cost of product has remained close to 2007 levels but has reduced as a proportion of sales because royalty payments have been received from distributors under the terms of their licenses.
Sales and Marketing costs for the year ended December 31, 2008, as compared to the year ended December 31, 2007, were $79,175 and $28,489 respectively, an increase of $50,686 .The increase was due to a higher level of activity which has resulted in improved revenues.
General and administrative expenses for the year ended December 31, 2008 and for the year ended December 31, 2007 were $680,635and $535,740, respectively, representing an increase of $144,895 or 27%. Cost increases continue to be well below the level of sales and profit growth.
Consulting expenses for December 31, 2008 were $926,954 and are $342,354 higher than the prior year as the company has been taking external advice on marketing to the gaming sector and also its overall trading policies. In addition, the recruitment of new Board members has increased costs in the second half of the year.
Salaries and wages continue to be well controlled being just approximately $13,000 up on the prior year at $383,832.
Total operating expenses for the year were $2,070,595, 19% of revenue compared with $1,538,100, 25% of revenue in the comparable period. The increase year on year of approximately $430k or 28% reflects higher costs in the second half but is still a considerable percentage improvement on fiscal 2007.
Interest expense for year ended December 31, 2008 and for the year ended December 31, 2007 was $590,988 and $651,790, respectively, a decrease of $60,802 or 9.3%.The lower costs in 2008 resulted in conversions of Series A 6% preferred redeemable stock so that less interest was payable.
Gain on sale of investments. On December 9, 2008 the company completed the sale of its investment in Plus Digital Solutions Limited for $2,572,500. This investment had a carrying value of $1,595,595 producing a profit on the sale of $976,905. Payment has been made in ordinary shares of the purchaser, the price of shares will be calculated by dividing the company’s net asset value as at 30th September 2008 by the number of shares outstanding. The consideration payable will be adjusted upwards or downwards based upon the company’s audited accounts as at 31st December 2008 or at closing price of the company’s shares on its initial trading day, whichever is the lower.
The company had previously reported a $122,900 gain on the sale of investments peripheral to its core business giving a total for the year of $1,065,945. Quoted investments held by the company fell in value during the final quarter of the year by $523,814 leaving a net gain on investments of $542,131.
Net income was $6,270,862 compared with $3,457,389 representing an increase of $2,813,473 or 81% on the comparable period. The income generated from improved revenues has been reflected in a significant improvement in net income.
Accounts receivable at the year end was $2,757,685 which equates to 94 days of revenues and compares with 140 days in the comparable period of last year. This improvement has been effected as the company has strengthened its position with customers and pressed them to pay to terms. The days outstanding improved in the final quarter of this year to 93 days. The company seeks to collect receivables on a ninety day basis.
Liquidity and Financial Resources
The Company had cash and cash equivalents of $8,281,899 at the end of December 31, 2008. The company is required to redeem its Series A 6% Preferred Redeemable stock in April 2010. The stock outstanding at the end of fiscal 2008 is valued at $4,464,628 a reduction from $7,582,806 in the prior year. See subsequent event note below when an institutional investor agreed to a company buy back of their stock and converted their Series A holding to common stock in the course of the transaction.(See subsequent events).The company has sufficient funds on deposit to discharge the remaining Series A liability. Operating expenses are approximately $600,000 per quarter.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| | | Fiscal Years Ended December 31, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Basic Earnings Per Share Computation: | | | | | | | | | |
| Net Income | | $ | 6,111,700 | | | $ | 3,355,256 | | | $ | (9,955,323 | ) |
| Weighted-average common shares outstanding | | | 56,811,000 | | | | 48,011,851 | | | | 44,168,683 | |
| Basic Earnings/(Loss) per share | | $ | 0.11 | | | $ | 0.07 | | | $ | (0.22 | ) |
| Diluted Earnings Per Share Computation: | | | | | | | | | | | | |
| Net Income | | $ | 6,111,700 | | | $ | 3,355,256 | | | $ | (9,955,323 | ) |
| Weighted-average common shares outstanding | | | 56,811,000 | | | | 48,011,851 | | | | 44,168,683 | |
| Effect of dilutive options outstanding | | | 6,291,255 | | | | *** 3,750,000 | | | | ** | |
| Total weighted-average shares outstanding | | | 63,102,255 | | | | 51,761,851 | | | | 44,168,683 | |
| Diluted earnings per share | | $ | 0.10 | | | $ | 0.06 | | | $ | (0.22 | ) |
**Excludes 6,911,091 warrants and 566,000 options as being anti dilutive
*** Excludes 4,081,148 warrants as being anti dilutive
Subsequent Events
On December 16, 2008 the company announced that Kevin Donovan joined the Company as its Chief Executive Officer, effective February 1, 2009. Mr. Donovan has over 25 years experience in corporate branding and licensing with prominent entities such as the 2002 Winter Olympics, professional sports properties and entertainment media companies. Also effective on February 1 2009, Anna Houssels, a current non-executive member of the Company’s Board of Directors, joined the Company’s executive management team as Vice President of Sales.
Mr Donovan is employed as Chief Executive Officer and Director under agreement commencing February 1 2009 for three years which may be extended by mutual agreement for further one year periods. Basic initial annual remuneration is $260,000 and is subject to annual upward review at the discretion of the Board. He has been awarded 1,500,000 share options vesting over the three years at an exercise price of $0.355. The other terms and conditions of the agreement are considered standard for an appointment of a senior executive.
Ms Houssels is employed as Executive Vice President of International Sales under an agreement dated February 1 2009 for three years which may be extended by mutual agreement for further one year periods. Basic initial annual remuneration is $375,000 and is subject to annual upward review at the discretion of the Board. Ms Houssels is eligible for a bonus on certain sales that she generates over an agreed minimum target determined by the board, and has been awarded 1,500,000 share options vesting over the three years at an exercise price of $0.355. The other terms and conditions of the agreement are considered standard for an appointment of a senior executive.
On December 15, 2008 the company entered into an agreement with an institutional investor in our Series A 6% preferred redeemable stock by which the company agreed to purchase and redeem 2,823,451 shares and the accompanying 960,000 warrants for $0.28 per share subject to approval from the majority of the other Series A investors. On February 5, 2009 the company announced that approval had been received, that the agreement was now unconditional and the company’s future redemption of Series A stock was reduced by $2,085,294 to $4,464,628. During the negotiation of this transaction, and prior to December 31, 2008, the investor converted its Series A stock into common stock and the company then purchased this stock on the same terms.
Off-Balance Sheet Arrangements
As of the date of this Annual Report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the company’s financial condition, changes in financial condition revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Risk Factors
Our business, financial condition and operating results are subject to a number of risk factors, both those that are known to us and identified below and others that may arise from time to time. These risk factors could cause our actual results to differ materially from those suggested by forward-looking statements in this document and elsewhere, and may adversely affect our business, financial condition or operating results. If any of those risk factors should occur, moreover, the trading price of our securities could decline, and investors in our securities could lose all or part of their investment in our securities. These risk factors should be carefully considered in evaluating the proposed merged entity and its prospects. The material below summarizes certain risks and is not intended to be exhaustive.
Certain Risk Factors Relating to our Business
The Company has generated increased revenues this year and its business model predicts incremental revenues in the foreseeable future.The predicted revenue depends on a continued expansion of take up of the EGC Electronic GameCards ™.
There is currently an uncertain regulatory environment in our industry, which could adversely affect our business and operations.
The gaming industry is intensively regulated by various governmental agencies which can have a significant effect on the economic environment in which we operate and limit our ability to increase revenues or cause our costs to increase.
There are substantial risks inherent in our business as we continue to commercialize new technological applications, and, as a result, we may not be able to successfully develop the GameCards for every commercial use as planned in our business model.
To date, the Company's research and development projects have produced commercially viable applications which have achieved acceptance and generated revenues the Company will have to continue development of its products to achieve the level of revenue and income anticipated in our business model. Some of our potential applications may not be successfully developed which would affect our ability to generate revenue and build a sustainable and profitable business.
We continue to develop products for acceptance in the broader market place outside the lottery sector. The Company cannot predict when broad-market acceptance will be achieved and we cannot reasonably estimate the projected size of any market that may develop. Our revenue growth and achievement of profitability will depend substantially on our ability to gain acceptance for our products accepted by customers in all markets.
Because we have international operations, we will be subject to risks associated with conducting business in foreign countries.
Because we have international operations in the conduct of our business, we are subject to the risks of conducting business in foreign countries, including:
| | · | different standards for the development, use, packaging and marketing of our products and technologies; |
| | · | difficulty in identifying, engaging, managing and retaining qualified local employees; |
| | · | difficulty in identifying and in establishing and maintaining relationships with, partners, distributors and suppliers of finished and unfinished goods and services; |
| | · | the potential burden of complying with a variety of foreign laws, trade standards and regulatory requirements; |
| | · | general geopolitical risks, such as political and economic instability, changes in diplomatic and trade relations; and |
| | · | import and export customs regulations. |
We will be exposed to risks associated with fluctuations in foreign currencies.
As part of our international operations, from time to time in the regular course of business, we convert dollars into foreign currencies and vice versa. The value of the dollar against other currencies is subject to market fluctuations and the exchange rate may or may not be in our favor.
We have limited sales and marketing capabilities, and may not be successful in selling or marketing our product.
The creation of infrastructure to commercialize products is a difficult, expensive and time-consuming process. We currently have limited sales and marketing capabilities, and would need to rely upon third parties to perform some of those functions. To the extent that we enter into co-promotion or other licensing arrangements, any revenues to be received by us will be dependent on the efforts of third parties if we do not undertake to develop our own sales and marketing capabilities. The efforts of third parties may not be successful. We may not be able to establish direct or indirect sales and distribution capabilities or be successful in gaining market acceptance for proprietary products or for other products. If we desire to market any products directly, we will need to develop a more robust marketing and sales force with technical expertise and distribution capability or contract with other companies with distribution systems and direct sales forces.
Our failure to further establish marketing and distribution capabilities or to enter into marketing and distribution arrangements with third parties could have a material adverse effect on our revenue and cash flows.
We are dependent on outside manufacturers for the manufacture of our products therefore we will have limited control of the manufacturing process and related costs.
We are developing products which will require third-party assistance in manufacturing. The efforts of those third parties may not be successful. We may not be able to establish or maintain relationships with third-parties to manufacture our products.
We are dependent on third parties to supply all raw materials used in our products and to provide services for the core aspects of our business. Any interruption or failure by these suppliers, distributors and collaboration partners to meet their obligations pursuant to various agreements with us could have a material adverse effect on our business, profitability and cash flows.
We rely on third parties to supply all raw materials used in our products. In addition, we rely and will continue to rely on third-party suppliers, distributors and collaboration partners to provide services for many aspects of our business. Our business and financial viability are dependent on the regulatory compliance and timely and effective performance of these third parties, and on the strength, validity and terms of our various contracts with these third-party suppliers, distributors and collaboration partners. Any interruption or failure by these suppliers, distributors and collaboration partners to meet their obligations pursuant to various agreements with us could have a material adverse effect on our business, financial condition, profitability and cash flows.
The Company's success depends on the attraction and retention of senior management with relevant expertise.
The Company's future success will depend to a significant extent on the continued services of its key employees. Particularly employees versed in gaming expertise who may be difficult to replace. The Company does not maintain key man life insurance for any executive. The Company's ability to execute its strategy also will depend on its ability to attract and retain qualified production, sales, marketing and additional managerial personnel. If we are unable to find, hire and retain qualified individuals, we could have difficulty implementing our business plan in a timely manner, or at all.
The Company will continue to need approval from governmental authorities in the United States and other countries to successfully realize commercial value from the Company's activities. Adverse events that are reported during regulatory trials or after marketing approval can result in additional limitations being placed on a product's use and, potentially, on withdrawal of the product from the market. Any adverse event, either before or after approval, can result in product liability claims against the Company, which could significantly and adversely impact the value of our Common Stock.
If export or import controls affecting our products are expanded, our business will be adversely affected.The U.S. government regulates the sale and shipment of numerous technologies by U.S. companies to foreign countries. If the U.S. or any other government places expanded export or import controls on our technology or products, our business would be materially and adversely affected. If the U.S. government determines that we have not complied with the applicable import regulations, we may face penalties in the form of fines or other punishment.
The Company's ability to protect its patents and other proprietary rights is not absolute, exposing it to the possible loss of competitive advantage.
The Company's subsidiaries have licensed rights to pending patents and have filed and will continue to file patent applications. If a particular patent is not granted, the value of the invention described in the patent would be diminished. Further, even if these patents are granted, they may be difficult to enforce. Efforts to enforce our patent rights could be expensive, distracting for management, unsuccessful, cause our patents to be invalidated, and frustrate commercialization of products. Additionally, even if patents are issued, and are enforceable, others may independently develop similar, superior, or parallel technologies to any technology developed by us, or our technology may prove to infringe upon patents or rights owned by others. Thus, the patents held by or licensed to us may not afford us any meaningful competitive advantage. Our inability to maintain our licenses and our intellectual property rights could have a material adverse effect on our business, financial condition and ability to implement our business plan. If we are unable to derive value from our licensed or owned intellectual property, the value of your investment in the Company will decline.
Certain Risk Factors Relating to our Stock
Electronic Game Card, Inc.’s Common Stock price has fluctuated significantly since January 2006 and may continue to do so in the future.
We anticipate that investors and market analysts will assess our performance by considering factors such as :
| | · | announcements of developments related to our business; |
| | · | developments in our strategic relationships with distributors of our products; |
| | · | announcements regarding the status of any or all of our collaborations or products; |
| | · | market perception and/or investor sentiment regarding our technology and products; |
| | · | announcements regarding developments in the lottery and gaming field in general; |
| | · | the issuance of competitive patents or disallowance or loss of our patent rights; |
| | · | and quarterly variations in our operating results. |
We will not have control over many of these factors but expect that they may influence our stock price. As a result, our stock price may be volatile and you may lose all or part of your investment.
Additional General Economic Conditions
The stock prices for many companies in our sector have experienced wide fluctuations that often have been unrelated to their operating performance. Such fluctuations may adversely affect the market price of our Common Stock.
The market for purchases and sales of the Company's Common Stock and Warrants may be very limited, and the sale of a limited number of shares or Warrants could cause the price to fall sharply.
Our securities are thinly traded. Accordingly, it may be difficult to sell shares of the Common Stock or the Warrants quickly without significantly depressing the value of the stock. Unless we are successful in developing continued investor interest in our stock, sales of our stock could continue to result in major fluctuations in the price of the stock.
Shareholder interest in the Company may be substantially diluted as a result of the sale of additional securities to fund the Company's plan of operation.
Our Certificate of Incorporation authorizes the issuance of an aggregate of 100,000,000 shares of Common Stock, on such terms and at such prices as the Board of Directors of the Company may determine. Of these shares, an aggregate of 57,109,426 shares of Common Stock have been issued 4,420,424 are reserved for conversion of outstanding Series A Convertible Redeemable Preferred Stock issued on November 29, 2006 and 2,888,667 and 477,723 are reserved for outstanding warrants issued with the Convertible Notes issued 2005, and 6,300,000 for the conversion of outstanding options issued in the Equity Compensation Plans 2007 and 2008 for employees and 375,000 warrants issued to consultants. Therefore, approximately 28,509,576 shares of Common Stock remain available for issuance by the Company to raise additional capital, in connection with prospective acquisitions or for other corporate purposes
Issuances of additional shares of Common Stock would result in dilution of the percentage interest in our Common Stock of all stockholders ratably, and might result in dilution in the tangible net book value of a share of our Common Stock, depending upon the price and other terms on which the additional shares are issued. In addition, the issuance of additional shares of Common Stock upon exercise of the Warrants, or even the prospect of such issuance, may be expected to have an effect on the market for the Common Stock, and may have an adverse impact on the price at which shares of Common Stock trade.
If securities or industry analysts do not publish research reports about our business, of if they make adverse recommendations regarding an investment in our stock, our stock price and trading volume may decline.
The trading market for our Common Stock will be influenced by the research and reports that industry or securities analysts publish about our business.
We may be the subject of securities class action litigation due to future stock price volatility.
In the past, when the market price of a stock has been volatile, holders of that stock have often initiated securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.
We do not currently intend to declare dividends on our Common Stock. We will not distribute cash to our stockholders until and unless we can develop sufficient funds from operations to meet our ongoing needs and implement our business plan. The time frame for that is inherently unpredictable, and you should not plan on it occurring in the near future, if at all.
| ITEM 7. | FINANCIAL STATEMENTS |
The financial statements, along with the notes thereto and the report of the Company’s independent registered public accounting firm thereon, required to be filed in response to this Item 7 begin on page F-1.
| ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None. The Company's independent registered accounting firm for the fiscal years ended December 31, 2008 and 2007 was Mendoza Berger & Company, LLP (“MB & Co.”), located at 9838 Research Drive, Irvine, CA 92618. MB & Co. issued an audit report for the years ended December 31, 2008 and 2007. The financial statements audited by MB & Co. for the fiscal years ended December 31, 2008 and 2007, do not contain an adverse opinion or a disclaimer of opinion.
| ITEM 8A. | CONTROLS AND PROCEDURES |
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in timely ensuring that (i) information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(a) Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company's principal executive and principal financial officers and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| | · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| | · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
With the participation of the Chief Executive Officer and Chief Financial Officer, the Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting. Based on this evaluation, the Company’s management concluded that the Company's internal control over financial reporting was effective as of December 31, 2008. In making this assessment, the company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
(b) Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in the report.
(c) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2008 that have materially affected, or are likely to materially affect, our internal control over financial reporting.
| ITEM 8B. | OTHER INFORMATION |
None.
PART III
| ITEM 9. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Our Board of Directors elects our executive officers annually. Our Directors are elected at the annual meeting of shareholders. Directors are elected to hold office until the next annual meeting. A majority vote of the directors who are in office is required to fill vacancies of the Board of Directors. The executive officers and directors of the Company currently are as follows :
| Name | | Age | | Title |
| The Lord Steinberg | | 72 | | Executive Chairman of the Board |
| Kevin Donovan | | 46 | | Director and Chief Executive Officer |
| Anna Houssels | | 40 | | Director and Executive Vice President Sales |
| Lee Cole | | 48 | | Director |
| Linden Boyne | | 65 | | Director, Chief Financial Officer and Secretary |
| Eugene Christiansen | | 64 | | Director |
| Paul Farrell | | 45 | | Director |
THE LORD STEINBERG, EXECUTIVE CHAIRMAN
Lord Steinberg is one of Britain's most successful businessmen and one of the most well known personalities in the gaming industry. He founded Stanley Leisure in Belfast in 1958 with one licensed betting shop. Stanley Leisure plc became the largest casino operator and fourth largest retail bookmaker with 600 shops in the United Kingdom. In 2005 Stanley sold its retail bookmaking operations for £504m (approx $1billion) and returned £327m (approximately $650million) to shareholders. In 2006, Stanley then sold the 45 casinos to Genting International for approximately $1.3billion During Lord Steinberg's tenure, Stanley Leisure grew both organically and through acquisition. In the last five years as publicly quoted company Stanley Leisure generated total shareholder returns at a compound annual growth of more than 25 percent. The acquired businesses were cultivated by adding seasoned management, structural renovations, synergistic business-lines, and improved locations. Some acquired businesses were relocated into special purpose built facilities, such as the Circus Casino Birmingham Star City, which is the largest casino in the United Kingdom.
In addition to his highly successful business career, Lord Steinberg was made a Conservative Life Peer in 2004 and is an active member of the House of Lords in the United Kingdom. He is a well known philanthropist and is a member of the Board of Directors of Medgenics, a U.S. incorporated biopharmaceutical company, L Sports Investments Ltd., Stanley Bet Holdings Ltd., and Stanley Bet Overseas Investments Ltd
KEVIN DONOVAN, DIRECTOR AND CEO
Mr. Donovan has over 25 years experience in corporate branding and licensing with prominent entities such as the 2002 Winter Olympics, professional sports properties and entertainment media companies. He brings a wealth of creative brand building, business development acumen and an entrepreneurial spirit to Electronic Game Card, Inc. Mr. Donovan most recently co-founded Planetwide Games, Inc. in 2004, a digital media company based on the patent-pending MashON social network applications platform that empowers consumers to interact with their favorite brands online. At Planetwide Games, Mr. Donovan was instrumental in bringing high profile brands into significant partnership deals, including those with Marvel Entertainment, Electronic Arts, National Geographic, NBC Universal Pictures, and Paramount Studios to name a few. Mr. Donovan also founded U4oria Discovery, Inc., a brand image development company, where he developed brand identity programs and product promotions for clients such as Subway Restaurants, Pearle Vision Centers, Kinko’s, Iceland Spring Water, NASCAR superstars and former Massachusetts Governor, Mitt Romney. Previously, Mr. Donovan was managing director and vice president of marketing for Fotoball USA, Inc., a premier sports and entertainment marketer and manufacturer that was acquired by K2 Inc., the sporting goods and recreational products company with brands such as Rawlings, Shakespeare, K2, Pflueger and Atlas. Mr. Donovan also served as president and CEO of Smoothie King Franchises, a privately held company of Smoothie Bars and Nutritional Lifestyle Centers based in the New Orleans.
While working on the 2002 XIX Winter Olympics, Mr. Donovan served as Director of Brand Image for the Salt Lake Organizing Committee, during which he was responsible for development of the entire look and feel of the Olympic Games including, the sales development and presentations, sales activation, education, and development process of the Brand Image program. He worked closely and coordinated with all 45 Organizing Committee functions in creating a global award-winning brand image. In addition, Mr. Donovan created the All-American SportPark, a 65 acre theme park on the strip in Las Vegas with Major League Baseball, NASCAR, and Callaway Golf. Donovan has also served as Senior Vice President of New Business Development for Saint Andrews Golf Corporation, the publicly traded parent company of All-American Sportpark. Currently, Mr. Donovan acts in multiple strategic advisory roles to the co-founder and President of Subway Restaurants, the number one franchise company with over 30,000 restaurants in 87 countries.
ANNA HOUSSELS, DIRECTOR AND EXECUTIVE VICE PRESIDENT
Ms. Houssels most recently was the general manager of international sales for Nakheel Corporation, a key entity of Dubai World and one of the largest real estate developers in the world. Previously Ms. Houssels oversaw VIP sales for CityCenter in Las Vegas, a $9.2 Billion mixed use real estate project developed as a joint venture between MGM Mirage and Dubai World. She is a member of the Board of Directors of Susan Dunn Inc., a world-renowned Luxury Spa Wear and Accessories company based in San Diego and also serves as a Director of LuxeGlobal, Inc., an international real estate company headquartered in Ranch Santa Fe, California. In addition, Ms. Houssels and Joanne Lucia A.S.I.D. have formed H&L Enterprises, an experienced International Design company with offices in California and Nevada specializing in designing, decorating and renovating homes nationally and internationally for over twenty years. Ms. Houssels’ real estate company, Houssels Properties, Inc., also operates in California and Nevada and is a successful real estate firm focused on selling luxury residences to a local and a large international network.
LEE J COLE, DIRECTOR
Lee Cole has extensive experience in technology growth companies and the venture capital markets. Lee has been a principal of Tech Capital Group, a technology consulting and investment firm with stakes in private and public information and healthcare technology companies since 1998. Lee Cole is also a Director of Enhance Biotech, Inc., since June 2004, Advance Nanotech, Inc., since October 4, 2004.
LINDEN J BOYNE, CFO, SECRETARY AND DIRECTOR
Linden Boyne joined NSS Newsagents plc in 1973 as a Regional Manager in charge of 220 stores. He was subsequently appointed to the Board in 1978 and became Retail Managing Director in 1990 with responsibility for 550 branches. He resigned in 1991 when the company was acquired. He was an independent company consultant from 1992 to 1999. Mr. Boyne has been employed by Sterling FCS Ltd since January 2003. Prior to that, he was employed as a Director of Ci4net Limited from 1999 to 2002. He has been the corporate Secretary of Innovate Oncology, Inc., since October 1, 2004 and the corporate Secretary of Anvet Pharma, Inc., since March 15, 2005.
EUGENE CHRISTIANSEN, DIRECTOR
Mr. Christiansen has been active as an executive and consultant to the commercial gambling and entertainment industries since 1976 through New York based Christiansen Capital Advisors. Mr. Christiansen has conducted studies of the economics, taxation, financial structure, and regulation of casino gaming, pari-mutuel wagering, and lotteries, and has counseled Manhattan and Washington, D.C. law firms in legal proceedings regarding gaming issues. Mr. Christiansen is the author of numerous articles dealing with casinos, horse racing, greyhound racing, jai alai, off-track betting, lotteries and related activities in trade, professional, and academic publications. He prepares authoritative statistical reports that are widely used domestically and abroad recognized throughout the world as the most comprehensive and authoritative description of the gambling industries of the U.S. Mr. Christiansen has co-authored an influential academic study of gambling, The Business of Risk: Commercial Gambling in Mainstream America (University Press of Kansas, 1985), and is a member of the advisory boards of the National Council on Problem Gambling and the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno.
PAUL FARRELL, DIRECTOR
Mr. Farrell joined Pequot Capital Management, a multi-billion investment adviser, in 2001. For seven years Mr. Farrell was a key member of Pequot’s Scout Fund Group, most recently co-manager and chief operating officer of the fund. Concurrent with his portfolio responsibilities at Pequot Capital Management, Mr. Farrell was one of seven members on the executive committee overseeing firm-wide investment strategy, operations and recruiting, and served as interim chief investment officer of Pequot Emerging Managers Fund, as well as a member of several internal investment committees. Previously, Mr. Farrell spent 13 years with Goldman Sachs, first as co-founder and manager of the Emerging Growth Research Group and then with Goldman Sachs Asset Management as chief investment officer of the firm’s US Value Equities division and as co-manager of the Capital Growth Fund and senior manager of the Small Cap Value Fund. Earlier in his career, Mr. Farrell was a partner with WR Capital Partners, LLC, a hybrid public and private equity partnership; managing director of Plaza Investments, an investment subsidiary of Geico Corp.; and a research analyst for consumer and cyclical stocks at Fred Alger Management. Mr. Farrell is currently on the Board of privately-held, New York based Kleinfeld Bridal and not-for-profit Gary Klinsky Childen’s Centers. Mr. Farrell has previously served on several public and private company boards.Mr. Farrell received his B.A., magna cum laude and M.A. in Economics from Yale University. Mr. Farrell is also a Certified Financial Analyst charter holder.
Family Relationships
None.
Legal Proceedings
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years :
| 1. | Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within the two years prior to that time; |
| 2. | Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| 3. | being subject to any order , judgment , or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or |
| 4. | Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. |
AUDIT COMMITTEE
The Audit committee comprises The Lord Steinberg, Lee Cole, Paul Farrell and Linden Boyne.
CODE OF CONDUCT AND ETHICS
The Board of directors approved and adopted a Code of Conduct and Ethics, which will be incorporated on the company website.
COMPLIANCE OF OFFICERS AND DIRECTORS
Based upon our review of Forms 3, 4, and 5 furnished to us during the last fiscal year, all of our officers, directors and persons holding more than ten percent of our equity securities have filed the reports required of them to be filed pursuant to Section 16 (a) of the Exchange Act, except the Directors filed their reports on Form 5’s late.
| ITEM 10. | EXECUTIVE COMPENSATION |
| | | | | | | | | | | Long Term | | |
| NAME | | | | ANNUAL COMPENSATION | | | | Compensation | | All Other |
| | | Year | | Salary | | Bonus | | Other | | Awards | | Compensation |
| The Lord Steinberg | | 2008 | | 83,333 | | Nil | | *2,000,000 options | | Nil | | Nil |
| Kevin Donovan | | 2008 | | Nil | | Nil | | Nil | | Nil | | Nil |
| Lee Cole | | 2006 | | Nil | | Nil | | Nil | | Nil | | Nil |
| | | 2007 | | Nil | | Nil | | Nil | | Nil | | Nil |
| | | 2008 | | Nil | | Nil | | Nil | | Nil | | Nil |
| | | | | | | | | | | | | |
| Anna Houssels | | 2008 | | 16,667 | | Nil | | *500,000 options | | Nil | | Nil |
| Eugene Christiansen | | 2008 | | 16,667 | | Nil | | *500,000 options | | Nil | | Nil |
| Linden Boyne | | 2006 | | Nil | | Nil | | Nil | | Nil | | Nil |
| | | 2007 | | Nil | | Nil | | Nil | | Nil | | Nil |
| | | 2008 | | Nil | | Nil | | Nil | | Nil | | Nil |
| Paul Farrell | | 2008 | | 12,500 | | Nil | | *500,000 options | | Nil | | Nil |
*Options for shares granted under the 2008 Equity Compensation Plan at $0.52
Mr Cole and Mr. Boyne are employed by Sterling FCS Ltd. ("SFCS") who is contracted to supply financial and corporate services to the Company and also the services of two Directors pursuant to annually renewable Consulting Agreement. The Consulting Agreement with SFCS dated March 2, 2006, between the Company and SFCS (the “SFCS Consulting Agreement”) requires SFCS to provide Management and staff for accounting, secretarial and corporate duties. Fees payable monthly at the rate of $16,667
There is no affiliation between SFCS and the Company. Neither Mr Cole or Mr. Boyne nor any of the Company’s other officers and directors own any interest in SFCS. Mr. Cole and Mr. Boyne receive one hundred percent of their cash compensation from SFCS through the SFCS Consulting Agreement.
The Company instituted a stock option plan for officers, key employees, consultants and advisors. The 2007 Equity Compensation Plan for officers, key employees, consultants and advisors was instituted in February 2007 and 4,000,000 options were issued.. The 2008 Equity Compensation Plan instituted in September of 2008 replicates the 2007 plan. Options for 3,500,000 were issued to new Board members. Below please find a list of the outstanding options under the 2007 and 2008 Plans as of December 31, 2008.
| ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information regarding the ownership of our Common Stock as of March 5, 2008 by (i) all those known by our management to be owners of more than five percent of the outstanding shares of Common Stock; (ii) each officer and director; and (iii) all officers and directors as a group. Unless otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares owned (subject to community property laws, where applicable), and is beneficial owner of them.
Name &Address of Beneeficial owner | | Nature of Ownership | | | Aggregate Number of Shares | | | Percentage of Common Stock % | |
The Lord Steinberg 210 Mercury Court, Tithebarn St Liverpool L2 2QP
UK | | Common Stock | | | | 5,956,200 | | | | 10.43 | |
| The Lord Steinberg | | Options for
Common Stock | | | | 2,000,000 | | | | 3.5 | |
| | | | | | | | | | | | |
Lee Cole Norfolk House 31 St James’s Sq London SW1Y 4JR | | N/A | | | | 0 | | | | 0 | |
| Linden Boyne 33 Green Lane, Blackwater Camberley GU17 9DG | | N/A | | | | 0 | | | | 0 | |
Anna Houssels 3780 Las Vegas Boulevard S Las Vegas NV 89109 | | Options for
Common Stock | | | | 500,000 | | | | 0.88 | |
Eugene Christiansen 250 W 57th Street, Ste 432, New York, NY 10107 | | Options for
Common Stock | | | | 500,000 | | | | 0.88 | |
| Paul Farrell 304 Bayberry Lane, Westport, | | Common Stock | | | | 200,000 | | | | 1.23 | |
| CT06880 | | Options for
Common Stock | | | | 500,000 | | | | | |
| Pequot Capital Management 500 Nyala Farm Road, Westport CT 06880 | | Common Stock | | | | 4,705,882 | | | | 8.24 | |
| Ingalls & Snyder LLC 61 Broadway, New York NY 10006 | | Common Stock | | | | 3,259,500 | | | | 5.71 | |
Trafelet Capital Management LP 590 Madison Ave 39th Fl New York NY 10022 * | | Common Stock | | | | 2,851,686 | | | | 4.99 | |
| All Executive Officers and Directors as a Group | | Common Stock | | | | 9,456,200 | | | | 15.63 | |
*Trafelet have subsequently sold their investment in the company see Item 6 page 13
| ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSATIONS |
None
| ITEM 13. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Mendoza Berger & Company LLP has served as our independent registered public accounting firm since August 2006 and for the year ended December 31, 2008. The following table shows the fees billed or expected to be billed to us for the audit and other services provided by our accountants for 2008 and 2007:
| | | 2008 | | | 2007 | |
| Audit Fees | | $ | 81,389 | | | $ | 71,736 | |
| Tax and Other Fees | | | 5,500 | | | | - | |
| Total Fees | | $ | 86,889 | | | $ | 71,736 | |
AUDIT FEES. This category includes the audit of our consolidated financial statements, and reviews of the financial statements included in our Quarterly Reports on Form 10-Q. This category also includes advice on accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, SEC registration statements and comment letters.
TAX FEES. These fees relate to the preparation and review of tax returns, tax planning and tax advisory services.
AUDIT RELATED FEES. For the fiscal year ended December 31, 2008, there were no fees billed for services reasonably related to the performance of the audit or review of the financial statements outside of those fees disclosed above under “Audit Fees”.
| ITEM 14. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (31) | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 31.1 | Written Statement of Chief Executive Officer with respect to compliance with Section 302 of the Sarbanes-Oxley Act of 2002. |
| | 31.2 | Written Statement of Chief Financial Officer with respect to compliance with Section 302 of the Sarbanes-Oxley Act of 2002. |
| (32) | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | 32.1 | Written Statement of Chief Executive Officer with respect to compliance with Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | 32.2 | Written Statement of Chief Financial Officer with respect to compliance with Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized, on this 23th day of March 2008.
ELECTRONIC GAME CARD, INC.
| DATE: March 23, 2009 |
| |
| /S/ |
| |
| LEE J COLE. |
| Principal Executive Officer |
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lee J Cole. and Linden Boyne, and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K 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
| /S/LEE J COLE | | | | March 23, 2008 |
| Lee J Cole | | Principal Executive Officer | | |
| | | and Director | | |
| | | | | |
| /S/LINDEN BOYNE | | | | March 23, 2008 |
| Linden Boyne | | Principal Accounting Officer, | | |
| | | Secretary and Director | | |
| | | | | |
| | | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Report of Independent Registered Public Accounting Firm | 25 |
| | |
| Consolidated Balance Sheets of Electronic Game Card, Inc. and Subsidiaries, as of December 31, 2008 and 2007 | 26 |
| | |
| Consolidated Statements of Income and Comprehensive Income of Electronic Game Card, Inc. and Subsidiaries for the years ended December 31, 2008 and 2007 | 27 |
| | |
| Consolidated Statement of Stockholders' Equity of Electronic Game Card, Inc. and Subsidiaries for the years ended December 31, 2008 and 2007 | 28 |
| | |
| Consolidated Statement of Cash Flows of Electronic Game Card, Inc. and Subsidiaries for the years ended December 31, 2008 and 2007 | 29 |
| | |
| Notes to Consolidated Financial Statements of Electronic Game Card, Inc. and Subsidiaries | 30 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Electronic Game Card, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Electronic Game Card, Inc., as of December 31, 2008 and 2007 and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 Electronic Game Card, Inc. as of December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
| /S/ MENDOZA BERGER & COMPANY, LLP |
| |
| |
| MENDOZA BERGER & COMPANY, LLP |
| Irvine, California |
| March 20, 2009 |
ELECTRONIC GAME CARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | December 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| ASSETS | | | | | | |
| | | | | | | |
| CURRENT ASSETS | | $ | | | | $ | | |
| Cash | | | 8,281,899 | | | | 4,753,040 | |
| Marketable securities | | | 876,186 | | | | - | |
| Accounts receivable | | | 2,757,685 | | | | 2,323,543 | |
| Deposit on inventory | | | 51,833 | | | | 70,071 | |
| Other receivables | | | 120,109 | | | | 92,100 | |
| Deferred charges | | | 38,119 | | | | 190,595 | |
| Value Added Tax receivable | | | 25,916 | | | | 31,531 | |
| TOTAL CURRENT ASSETS | | | 12,151,747 | | | | 7,460,880 | |
| | | | | | | | | |
| PROPERTY AND EQUIPMENT | | | | | | | | |
| Machinery and equipment | | | 68,900 | | | | 76,073 | |
| Office equipment | | | 58,078 | | | | 66,965 | |
| Furniture & fixtures | | | 1,017 | | | | 1,402 | |
| Less accumulated depreciation | | | (106,398 | ) | | | (100,390 | ) |
| PROPERTY AND EQUIPMENT, NET | | $ | 21,597 | | | $ | 44,050 | |
| | | | | | | | | |
| OTHER ASSETS | | | | | | | | |
| Patents | | | 258,321 | | | | 183,034 | |
| Investments | | | 6,497,470 | | | | 2,886,427 | |
| TOTAL ASSETS | | $ | 18,929,135 | | | $ | 10,574,391 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| Accounts payable | | $ | 749,118 | | | $ | 659,891 | |
| Accrued expenses | | | 268,748 | | | | 560,046 | |
| TOTAL CURRENT LIABILITIES | | | 1,017,866 | | | | 1,219,937 | |
| | | | | | | | | |
| NON-CURRENT LIABILITIES | | | | | | | | |
| ��Deferred license fees | | | 279,625 | | | | 779,625 | |
| | | | | | | | | |
| TOTAL LIABILITIES | | | 1,297,491 | | | | 1,999,562 | |
| Series A 6% Convertible Redeemable Preferred Stock $.001 par value; 10,000,000 shares authorized; 4,420,404 issued and outstanding in 2008 and 7,507,729 in 2007. | | | 4,464,628 | | | | 7,582,806 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| Preferred stock; $0.001 par value; 10,000,000 shares authorized | | | - | | | | - | |
Common stock; $0.001 par value; 100,000,000 shares authorized; 57,137,661 and 48,011,851 shares issued and outstanding in 2008 and 2007, respectively | | | 57,137 | | | | 48,012 | |
| Additional paid in capital | | | 33,318,440 | | | | 27,264,272 | |
| Accumulated other comprehensive loss | | | (1,015,855 | ) | | | (856,693 | ) |
| Accumulated deficit | | | (19,192,706 | ) | | | (25,463,568 | ) |
| TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | | | 13,167,016 | | | | 992,023 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | $ | 18,929,135 | | | $ | 10,574,391 | |
The accompanying notes are an integral part of these consolidated financial statements.
ELECTRONIC GAME CARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| | | Year Ended | | | Year Ended | |
| | | December 31, 2008 | | | December 31, 2007 | |
| | | | | | | |
| REVENUES | | | | | | |
| Product sales | | $ | 8,141,086 | | | $ | 5,469,683 | |
| Royalty and licensing | | | 2,507,510 | | | | 568,375 | |
| TOTAL REVENUES | | | 10,648,596 | | | | 6,038,058 | |
| | | | | | | | | |
| COST OF SALES | | | 2,550,147 | | | | 1,474,311 | |
| Gross margin | | | 8,098,449 | | | | 4,563,747 | |
| | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | |
| Selling and marketing | | | 79,175 | | | | 28,489 | |
| General and administrative | | | 680,635 | | | | 535,740 | |
| Consulting expenses | | | 926,954 | | | | 584,600 | |
| Salaries and wages | | | 383,831 | | | | 370,633 | |
| Loss from joint venture | | | - | | | | 18,638 | |
| TOTAL OPERATING EXPENSES | | | 2,070,595 | | | | 1,538,100 | |
| | | | | | | | | |
| Income from operations | | | 6,027,854 | | | | 3,025,647 | |
| | | | | | | | | |
| Other income/ (expense) | | | | | | | | |
| Interest income | | | 291,865 | | | | 196,545 | |
| Interest expense | | | (590,988 | ) | | | (651,790 | ) |
| Gain on termination of joint venture | | | - | | | | 31,127 | |
| Gain on sale of investments | | | 542,131 | | | | 855,860 | |
| | | | 243,008 | | | | 431,742 | |
| | | | | | | | | |
| Net income before provision (benefit) for income taxes | | $ | 6,270,862 | | | $ | 3,457,389 | |
| | | | | | | | | |
| Provision (benefit) for income taxes | | | - | | | | - | |
| | | | | | | | | |
| Net income | | $ | 6,270,862 | | | $ | 3,457,389 | |
| | | | | | | | | |
| Foreign currency translation adjustment loss | | | (159,162 | ) | | | (102,133 | ) |
| | | | | | | | | |
| Comprehensive income | | $ | 6,111,700 | | | $ | 3,355,256 | |
| | | | | | | | | |
| Net income per share - basic | | $ | 0.11 | | | $ | 0.07 | |
| Net income per share - diluted | | $ | 0.10 | | | $ | 0.07 | |
| Comprehensive income per share – basic | | $ | 0.11 | | | $ | 0.07 | |
| Comprehensive income per share –diluted | | $ | 0.10 | | | $ | 0.06 | |
| Weighted average shares outstanding - basic | | | 56,851,000 | | | | 48,011,851 | |
| | | | | | | | | |
| Weighted average shares outstanding - diluted | | | 63,102,255 | | | | 51,761,851 | |
The accompanying notes are an integral part of these consolidated financial statements.
ELECTRONIC GAME CARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| | | | | | | | | | | | | | | Accumulated | | | Total | |
| | | Common | | | Additional | | | | | | Other | | | Stockholders’ | |
| | | Stock | | | Paid In | | | Accumulated | | | Comprehensive | | | Equity | |
| | | Shares | | | Amount | | | Capital | | | Deficit | | | Loss | | | (Deficit) | |
| | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2006 | | | 44,168,683 | | | $ | 44,169 | | | $ | 25,188,340 | | | $ | (28,920,957 | ) | | $ | (754,560 | ) | | $ | (4,443,008 | ) |
| Shares issued to consultants for services | | | 137,500 | | | | 138 | | | | 57,362 | | | | - | | | | - | | | | 57,500 | |
| Shares issued for investments | | | 2,889,399 | | | | 2,889 | | | | 1,194,954 | | | | - | | | | - | | | | 1,197,843 | |
| Shares transferred from redeemable preference shares | | | 816,269 | | | | 816 | | | | 823,616 | | | | - | | | | - | | | | 824,432 | |
| Currency translation | | | - | | | | - | | | | - | | | | - | | | | (102,133 | ) | | | (102,133 | ) |
| Net income | | | - | | | | - | | | | - | | | | 3,457,389 | | | | - | | | | 3,457,389 | |
| Balance December 31, 2007 | | | 48,011,851 | | | | 48,012 | | | | 27,264,272 | | | | (25,463,568 | ) | | | (856,693 | ) | | | 992,023 | |
| Shares transferred from redeemable preference shares | | | 1,022,657 | | | | 1,022 | | | | 1,031,862 | | | | - | | | | - | | | | 1,032,884 | |
| Shares issued to consultants for services | | | 440,000 | | | | 440 | | | | 191,560 | | | | - | | | | - | | | | 192,000 | |
| Shares issued for investments | | | 3,045,125 | | | | 3,045 | | | | 1,674,628 | | | | - | | | | - | | | | 1,677,673 | |
| Share options exercised | | | 1,766,342 | | | | 1,766 | | | | 307,344 | | | | - | | | | - | | | | 309,110 | |
| Shares converted from | | | 2,851,686 | | | | 2,852 | | | | 2,848,774 | | | | | | | | | | | | 2,851,626 | |
| preferred stock | | | | | | | | | | | - | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Currency translation | | | - | | | | - | | | | - | | | | - | | | | (159,162 | ) | | | (159,162 | ) |
| Net income | | | - | | | | - | | | | - | | | | 6,270,862 | | | | - | | | | 6,270,862 | |
| Balance December 31, 2008 | | | 57,137,661 | | | | 57,137 | | | | 33,318,440 | | | | (19,192,706 | ) | | | (1,015,855 | ) | | | 13,167,016 | |
The accompanying notes are an integral part of these consolidated financial statements.
ELECTRONIC GAME CARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Year Ended | | | Year Ended | |
| | | December 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES : | | | | | | |
| Net income | | $ | 6,270,862 | | | $ | 3,457,389 | |
| Adjustments to reconcile net income to cash provided by operating activities : | | | | | | | | |
| Depreciation and amortization | | | 22,453 | | | | 21,763 | |
| Deferred charges | | | 152,476 | | | | 152,476 | |
| Deferred license fees | | | (500,000 | ) | | | - | |
| Gain on termination of joint venture | | | - | | | | (31,127 | ) |
| Gain on sale of investments | | | (542,131 | ) | | | (855,860 | ) |
| Stock issued for services | | | 192,000 | | | | 57,500 | |
| Redeemable preferred shares issued for interest | | | 590,988 | | | | - | |
| Loss from joint venture | | | - | | | | 18,638 | |
| Change in operating assets and liabilities : | | | | | | | | |
| Increase in accounts receivable | | | (434,142 | ) | | | (1,908,476 | ) |
| Decrease (increase) in deposit on inventory | | | 18,238 | | | | 27,500 | |
| (Increase) decrease in value added tax receivable | | | 5,615 | | | | (11,927 | ) |
| (Increase) in other receivables | | | (28,009 | ) | | | (92,100 | ) |
| (Increase) decrease in accounts payable | | | 89,227 | | | | (480,400 | ) |
| Increase (decrease) in accrued liabilities | | | (291,298 | ) | | | 560,046 | |
| Increase in deferred license fees | | | - | | | | 779,625 | |
| Net cash provided by operating activities | | $ | 5,546,279 | | | $ | 1,695,047 | |
| CASH FLOWS FROM INVESTING ACTIVITIES : | | | | | | | | |
| Purchase of intangible assets | | | (75,287 | ) | | | (153,800 | ) |
| Purchase of property and equipment | | | - | | | | (3,627 | ) |
| Purchase of investments | | | (1,759,500 | ) | | | (1,214,455 | ) |
| Proceeds from sale of investments | | | 465,890 | | | | 1,400,000 | |
| Net cash (used in) provided by investing activities | | $ | (1,368,897 | ) | | $ | 28,118 | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES : | | | | | | | | |
| Receipts on related party receivable | | | - | | | | 79,275 | |
| Redemption of convertible preferred stock | | | (798,472 | ) | | | - | |
| Proceeds from issuance of common stock | | | 309,111 | | | | - | |
| Net cash (used in) provided by financing activities | | $ | (489,361 | ) | | $ | 79,275 | |
| | | | | | | | | |
| Foreign Exchange Effect on Cash | | | (159,162 | ) | | | (102,133 | ) |
| Net Increase (Decrease) in Cash | | | 3,528,859 | | | | 1,700,307 | |
| Cash at Beginning of Year | | | 4,753,040 | | | | 3,052,733 | |
| Cash at End of Year | | $ | 8,281,899 | | | $ | 4,753,040 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | | | | |
| Cash paid during the year for : | | | | | | | | |
| Interest | | $ | - | | | $ | - | |
| Income taxes | | $ | - | | | $ | - | |
| Shares issued for investments | | $ | 1,677,673 | | | $ | 1,197,841 | |
| Shares issued for redeemable preference shares | | $ | 1,032,884 | | | $ | 824,432 | |
| Redeemable preference shares issued for interest | | $ | 590,988 | | | $ | - | |
| Share issued for consulting services | | $ | 192,000 | | | $ | 57,500 | |
The accompanying notes are an integral part of these consolidated financial statements
ELECTRONIC GAME CARD, INC AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
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 until August 8, 2002, then issuing stock for services. This date has been treated as the date of inception. 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. The Company ceased being a development stage company in 2006.
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.
Nature of Business
The Company engages in the development, marketing, sale and distribution of recreational electronic software which primarily targets towards lottery and sales promotion markets through its Great Britain subsidiary.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts for the following companies :
| | · | Electronic Game Card, Inc. (Formerly Scientific Energy, Inc.) (Nevada Corporation) |
| | · | Electronic Game Card, Ltd. (United Kingdom Corporation) |
| | · | Electronic Game Card Marketing, Inc. (A Delaware Corporation) |
The results of subsidiaries acquired during the year are consolidated from their effective dates of acquisition. All significant inter-company accounts and transactions have been eliminated.
Basis of Presentation
The Company has recently ceased preparing its financial statements on the basis of the accounting principles applicable to a "going concern", which assumed 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. Management previously felt the Company was a going concern as the Company had suffered from requiring net losses from operations, had redeemable preference shares in an amount in excess of available cash, and had an accumulated deficit. Based upon the operating results of the past two years the Company has increased its comprehensive income from $3,355,256 as of December 31, 2007 to $6,111,700 as of December 31, 2008. As a result of the Company’s profitability and positive working capital of approximately $11,000,000, management no longer believes the Company is a “going concern.” In addition, based on its current financial projections, management expects to be able to maintain its sales level through their current product sales and licensing agreements and thus be able to discharge their liabilities in the normal course of business through maintaining a positive working capital. Management will continue to carefully monitor their financial position by examining past results from operations and budgeting their capital expenditures for the future.
Concentrations 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.
The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. At December 31, 2008, the Company did not have any balances in these accounts in excess of the FDIC insurance limits. For banks outside of the United States, the Company maintains its cash accounts at credit worthy financial institutions.
For the year ended December 31, 2008, the Company transacted its business with three (3) distributors whose customers accounted for 47% of total revenues. Total revenues from these distributors and their customers were approximately $5,049,095 for the year ended December 31, 2008. Total accounts receivable from these related distributors and their customers were $1,077,000 at December 31, 2008.
For the year ended December 31, 2008, purchases from one (1) manufacturer totaled $2,462,908 or 23% of total sales. The Company believes this manufacturer to be in good financial standing as of December 31, 2008.
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 | |
| | | | |
| Furniture and fixtures | | 7 years | |
| Plant and equipment | | 3 – 5 years | |
| Office equipment | | 3 years | |
Maintenance and repairs are charged to operations; improvements and betterments are capitalized. The cost of property sold or otherwise disposed of and the accumulated depreciation thereon is eliminated from the property and related accumulated depreciation accounts, and any resulting gain or loss is credited or charged to the statements of operations.
Depreciation expense for the years ending December 31, 2008 and 2007, were $22,453 and $21,763, respectively
Advertising Costs
Advertising costs are expensed as incurred. For the years ended December 31, 2008 and 2007, advertising costs were $6,731 and $28,489, respectively.
Revenue Recognition
Revenue from product sales, net of estimated provisions, is recognized when the merchandise is shipped to an unrelated third party, as provided in Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" (SAB104"). Accordingly, revenue is recognized when all four of the following criteria are met:
| | · | persuasive evidence that an arrangement exists; |
| | · | delivery of the products have occurred; |
| | · | the selling price is both fixed and determinable; |
| | · | collectibility is reasonably probable. |
Foreign Currency Translation
The Company's primary functional currencies are the United States Dollar (USD) and the Great Britain Pound (GBP). Assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Expenses are translated at the average exchange rates in effect during the period. Translation gains and losses not reflected in earnings are reported in accumulated other comprehensive income/(loss) in stockholders' equity.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.
Basic and Diluted Income/Loss per Share
Basic profit per share has been computed by dividing the profit for the year applicable to the common stockholders by the weighted average number of common shares outstanding during the years. As of December 31, 2008, the Company had 3,741,390 warrants and 2,800,000 options outstanding to purchase up to 6,541,390 shares of common stock. However, the effect of the Company's common stock equivalents would be anti-dilutive for the warrants and they have been excluded from this disclosure for December 31, 2008 and 2007 and thus were not considered.
| | | 2007 | | | EPS Basic | | EPS Fully Diluted | | 2008 | | | EPS Basic | | EPS Fully Diluted | |
| Common stock | | | 44,168,683 | | | $ | 0.78 | | | | | | 57,109,426 | | | $ | 0.11 | | | | |
| Warrants | | | 2,888,667 | | | | | | | | | | 2,888,667 | | | | | | | | |
| Options | | | 4,446,000 | * | | | | | | | | | 2,800,000 | ** | | | | | | | |
| Series A | | | 7,507,729 | | | | | | | | | | 4,420,424 | | | | | | | | |
| | | | | | | | | | $ | 0.59 | | | | | | | | | $ | 0.11 | |
* Excludes 20,000 options at $1.00 and 3,066,978 warrants at $1.00 and 477,723 warrants at $1.85 as anti dilutive. **Excludes 477,723 warrants at $1.85 as anti dilutive
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. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
The Company is subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the Company operates. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities.
Stock Compensation for Non-Employees
At December 31, 2008, the Company has an employee compensation plan, which is described more fully in Note 8. Prior to 2003, the Company accounted for those plans under the recognition and measurement provision of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in previously reported results, as all options granted under those plans has an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provision of the FASB Statement No. 123, Accounting for Stock-Based Compensation, for stock-based employee compensation. All prior periods presented have been restated to reflect the compensation cost that would have been recognized had the recognition provision of Statement No. 123 been applied to all awards granted to employees after January 1, 2002.
Recent Accounting Pronouncements
In December 2007, the EITF of the FASB reached a consensus on Issue No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1). The EITF concluded on the definition of a collaborative arrangement and that revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF 99-19 and other accounting literature. Based on the nature of the arrangement, payments to or from collaborators would be evaluated and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature would be presented. Companies are also required to disclose the nature and purpose of collaborative arrangements along with the accounting policies and the classification and amounts of significant financial-statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure under EITF 07-1 applies to the entire collaborative agreement. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. We do not expect this will have a significant impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)), which replaces SFAS No. 141, Business Combinations, requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. SFAS No. 141 (R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect this will have a significant impact on our financial statements.
In December 2007, FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements (SFAS No. 160), which amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS No. 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This Statement also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment. The Statement also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This Statement applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect this will have a significant impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161 (SFAS 161), Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (SFAS 133). This statement is intended to improve financial reporting of derivative instruments and hedging activities by requiring enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The provisions of SFAS 161 are effective for fiscal years beginning after November 15, 2008. This statement is effective for us on January 1, 2009. Early adoption of this provision is prohibited. We do not expect this statement to have a material impact on our consolidated financial statements.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. This FSP is effective prospectively for intangible assets acquired or renewed after January 1, 2009. We do not expect FSP 142-3 to have a material impact on our accounting for future acquisitions of intangible assets.
In May, 2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This statement was effective for us on November 15, 2008 and did not have a material impact on our consolidated financial statements.
On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1 (FSP APB 14-1), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FSP APB 14-1 will be effective for the Company on January 1, 2009. The adoption of FSP APB 14-1 is not expected to have a material impact on our consolidated results of operations or financial position.
On June 16, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 (FSP No. EITF 03-6-1), Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. FSP EITF 03-6-1 will be effective for the Company on January 1, 2009. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on our consolidated results of operations or financial position.
In June 2008, the FASB issued EITF Issue 07-5 (EITF 07-5), Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock. EITF No. 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 Accounting for Derivatives and Hedging Activities, specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. EITF 07-5 is effective for us on January 1, 2009. The adoption of EITF 07-5 is not expected to have a material impact on our consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (FSP 03-6-1). FSP 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method described in SFAS No. 128, Earnings Per Share. This FSP is effective for us on January 1, 2009 and requires all prior-period earnings per share data that are presented to be adjusted retrospectively. We do not expect FSP 03-6-1 to have a material impact on our earnings per share calculations.
In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. As it relates to our financial assets and liabilities recognized or disclosed at fair value in our financial statements on a recurring basis (at least annually), the adoption of FSP 157-3 did not have a material impact on our consolidated financial statements.
In December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) About Transfers of Financial Assets and Interest in Variable Interest Entities (FSP 140-4). FSP 140-4 requires additional disclosure about transfers of financial assets and an enterprise’s involvement with variable interest entities. FSP 140-4 is effective for the first reporting period ending after December 15, 2008. FSP 140-4 is not expected to have a material impact on our consolidated financial statements.
Reclassifications
Certain amounts from the prior year have been reclassified to conform with the 2008 presentation.
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, 2008, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $11,945,052 in the United States and $7,247,654 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. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.
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, 2008 and 2007 income tax expense was $0 and $0, respectively.
| | | 2008 | | | 2007 | |
| Income Tax Provision at Statutory rate | | | 3,220,000 | | | $ | 1,210,000 | |
| Adjustment to reconcile to the Income tax provision: | | | | | | | | |
| Valuation allowances | | | - | | | | | |
| Benefit of Net Operating loss carry forward | | | (3,220,000 | ) | | | (1,210,000 | ) |
| | | | | | | | | |
| Provision for Income Tax | | | - | | | | - | |
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.
The Company implemented FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. For the years ended December 31, 2008 and 2007, the Company’s uncertain tax position includes the informational return filing for certain foreign corporations pursuant to IRC §6038 and §6046. The Company does not expect this uncertainty to have a material impact on its consolidated financial statements.
NOTE 3 - SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK
On November 29, 2006, the Company obtained the consent of the majority in interest of the investors in the private placement of Convertible Promissory Notes and Warrants issued March 24, 2005 and April 5, 2005 to exchange their Notes for Series A Convertible Redeemable Preferred Stock. The Note Holders exchanged $8,666,000 of 6% Notes due in March and April of 2007, convertible at $1.50 per share for 5,777,333 shares of Series A Convertible Redeemable Preferred Stock. The Series A Shares were issued for $1.50 per share and are convertible at $1.01 per share into 8,580,198 shares of Common Stock. Each share of Series A Convertible Redeemable Preferred Stock is redeemable on March 15, 2010 at the original issuance price of $1.50 plus all unpaid dividends, if not converted prior to that date.
At the time of the exchange of the Convertible Promissory Notes for the Series A Convertible Redeemable Preferred Stock, the Company issued 13,593,725 shares of Common Stock as additional penalty shares pursuant to the Registration Rights Agreement. It was agreed that these penalty shares were issued in lieu of any Non-Registration Statement Penalty shares that may have accrued and any other claims.
At the time of the exchange of the Convertible Promissory Notes for the Series A Convertible Redeemable Preferred Stock, the Company reduced the exercise price of the 2,888,667 warrants originally issued with the Convertible Notes in March and April of 2005 from $1.85 to $.50. On December 8, 2006, $259,018 of Series A Convertible Redeemable Preferred shares were converted into 256,200 shares of Common Stock.
During the year ended December 31, 2007, $824,432 of Series A Convertible Redeemable Preferred Stock was converted to 816,269 shares of common stock.
During the year ended December 31, 2008, $3,118,178 of Series A Convertible Redeemable Preferred Stock was converted and redeemed to 3,874,343 shares of common stock
On December 15, 2008 the Company entered into an agreement with an institutional investor in the Series A 6% preferred redeemable stock by which the Company agreed to purchase 2,851,686 shares and the accompanying 960,000 warrants for $0.28 per share subject to approval from the majority of the other Series A investors. During the negotiation of this transaction, and prior to December 31, 2008, the investor converted its Series A preference shares into common stock. Subsequent to year end, on February 5, 2009, the Company received approval to purchase the shares pursuant to the agreement from a majority of the other Series A investors.
Series A Preferred Stock
| Preferred stock issued for redemption of Convertible Notes Payable | | $ | 8,666,000 | |
| Converted during the years ended December 31, 2006 and 2007 | | | (1,083,194 | ) |
| Balance at December 31, 2007 | | | 7,582,806 | |
| Converted during the year ended December 31, 2008 | | | (3,118,178 | ) |
| Balance at December 31, 2008 | | $ | 4,464,628 | |
NOTE 5 - RELATED PARTY TRANSACTIONS
Eugene Christiansen, a Director of the Company, was paid $150,000 in consultancy fees during the year.
NOTE 6 - COMMON STOCK TRANSACTIONS
The Company had the following common stock transactions during the years ended December 31, 2008 and 2007:
For the year ended December 31, 2007
| | · | 816,269 shares of common stock issued related to the conversion of Series A Convertible Redeemable Preferred Stock. |
| | · | 2,889,399 shares of common stock issued for investments. |
| | · | 137,500 shares of common stock issued for consulting services. |
For the year ended December 31, 2008
| | · | 3,874,343 shares of common stock issued related to the conversion and redemption of Series A Convertible Redeemable Preferred Stock. |
| | · | 3,045,125 shares of common stock issued for investments. |
| | · | 440,000 shares of common stock issued for consulting services. |
| | · | 1,766,342 shares of common stock issued related to the exercise of options. |
NOTE 7 - STOCK OPTIONS AND 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, non-qualified 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, 2006, 315,250 options have been exercised and 566,000 options are outstanding.
The fair value of each option granted is estimated on the grant date using the closing stock price on the grant date. 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 March 24 and April 6, 2005, the Company issued 3,366,390 warrants. Each warrant is exercisable for a period of five years at a price of $1.85 for one share of common stock.
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.
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 Warrant Agreement provided for a cashless exercise of the warrants by permitting the holder to exchange two warrants for one share of stock. Simultaneous with the closing, 151,784 warrants were exchanged for 75,892 shares and 343,666 warrants were exercise at $1.00 per share. The fair value of each warrant granted is estimated on the grate date using the closing stock price on the grant date. In 2004 the Company has recorded $3,961,072 in compensation expense in connection with the granting and cashless provision of the warrants detailed above.
In connection with the issuance of convertible debt on March 24, 2005 and April 6, 2005, the Company issued 2,888,667 warrants. Each warrant is exercisable for a period of five years at a price of $1.85 for one share of common stock. The fair value of the warrants was estimated at $2,384,160 using the Black-Scholes options pricing model with the following assumptions: no dividend, risk-free interest rate of 4.3%, and an expected life of 5 years and volatility of 96%. The values of the warrants have been booked as deferred charges and are being amortized over the two year life of the convertible debt.
On November 29, 2006 the exercise price of the warrants was reduced to $.50 as part of the exchange of Convertible Notes for Series A Convertible Redeemable Preferred exchange.
In connection with the issuance of convertible debt on March 24, 2005 and April 6, 2005, the Company issued 477,723 placement agent warrants. Each warrant is exercisable for a period of five years at a price of $1.85 for one share of common stock. The fair value of the warrants was estimated at $626,578 using the Black-Scholes options pricing model with the following assumptions: no dividend, risk-free interest rate of 4.3%, and an expected life of 5 years and volatility of 96%. The values of the warrants have been booked as deferred charges and were amortized over the two year life of the convertible debt.
In connection with the November 29, 2006 exchange of Series A Convertible Redeemable Preferred Stock for the Convertible Debt issued on March 24, 2005 and April 6, 2005, the Company reduced the exercise price to $.50 from $1.85 for the 2,888,667 warrants issued with the Convertible Debt. Each warrant is exercisable for a period of five years, and their term was not extended.
The fair value of the warrants was estimated at $189,042 using the Black-Scholes options pricing model with the following assumptions : no dividend, risk-free interest rate of 4.3%, and an expected life of 5 years and volatility of 96%. The values of the warrants have been booked as deferred charges and were amortized over the two year life of the convertible debt.
The following table sets forth the options outstanding as of December 31, 2007 and 2008 :
| | | | | | Weighted | | | | |
| | | | | | Average | | | Weighted | |
| | | | | | Exercise | | | Average | |
| | | Options | | | Price | | | Fair Value | |
| Options outstanding, December 31, 2006 | | | 566,000 | | | $ | 0.52 | | | | - | |
| Granted, Exercise price more than fair value | | | 4,000,000 | | | $ | 0.215 | | | | - | |
| Granted, Exercise price less than fair value | | | | | | | | | | | | |
| - Expired | | | - | | | | - | | | | - | |
| - Exercised | | | - | | | | - | | | | - | |
| - Cancelled | | | (816,000 | ) | | $ | 0.427 | | | | - | |
| Options outstanding, December 31, 2007 | | | 3,750,000 | | | $ | 0.215 | | | | - | |
| | | | | | | | | | | | | |
| Exercised | | | 950,000 | | | $ | 0.215 | | | | | |
| | | | | | | | | | | | | |
| Options outstanding, December 31, 2008 | | | 2,800,000 | | | $ | 0.215 | | | | - | |
A summary of the options outstanding as of December 31, 2008 by range of exercise prices is shown as follows :
| | | | | | | | | | Weighted | | Weighted | |
| | | | | | Weighted | | Shares / | | Average | | Average | |
| | | | Shares / | | Average | | Warrants | | Exercise Price | | Contractual | |
| Exercise | | Warrants | | Exercise | | Currently | | Currently | | Remaining | |
| Price | | Outstanding | | Price | | Exercisable | | Exercisable | | Life | |
| | | | | | | | | | | | | | |
| $ | 0.215 | | 2,800, 000 | | $ | 0.215 | | 2,800,000 | | $ | 0.215 | | 3years | |
The following table sets forth the warrants outstanding as of December 31, 2008 :
| | | | | | Weighted | | | | |
| | | Options / | | | Average | | | Weighted | |
| | | Warrants | | | Exercise | | | Average | |
| | | Shares | | | Price | | | Fair Value | |
| Warrants outstanding, December 31, 2008 | | | 2,888,667 | | | $ | 0.5 | | | $ | 0.5 | |
| Granted, Exercise price more than fair value | | | 375,000 | | | $ | 0.52 | | | $ | 0.52 | |
| Granted, Cashless Exercise price more than fair value | | | 477,723 | | | $ | 1.85 | | | $ | 1.85 | |
| Expired | | | 3,066,978 | | | | | | | | | |
| | | | | | | | | | | | | |
| Warrants outstanding, December 31, 2008 | | | 3,741390 | | | $ | 1.06 | | | | 1.06 | |
The following table sets forth the summary of warrants outstanding as of December 31, 2008 by range of exercise price :
| | | | | | | | | | | | | | | Weighted | | | | | | | |
| | | | | | | | | Weighted | | | | | | | | | | | | | |
| | | | | | | | | Average | | | | | | | | | | | | | |
| | | Exercise | | | | | | | | | | | | | | | | | | | |
| | | Price | | | Outstanding | | | Price | | | Exercisable | | | Exercisable | | | Life | | | $ | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 1.00 | | | | 3,066,978 | | | $ | 1.00 | | | | 3,066,978 | | | $ | 1.00 | | | 0.25 | | | | 3,066,978 | |
| | | $ | 0.50 | | | | 2,888,667 | | | $ | 0.50 | | | | 2,888,667 | | | $ | 0.50 | | | 2.25 years | | | | 1,444,333 | |
| Dec 31, 2007 | | $ | 1.85 | | | | 477,723 | | | $ | 1.85 | | | | 477,723 | | | $ | 1.85 | | | 2.25 years | | | | 883,788 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercised | | | | | | | - | | | | | | | | - | | | | | | | | | | | | | |
| Cancelled | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dec 31, 2007 | | | | | | | 6,433,368 | | | | | | | | 6,433,368 | | | $ | 0.84 | | | 1.58 years | | | | 5,395,099 | |
| Issued | | $ | 0.52 | | | | 375,000 | | | $ | 0.52 | | | | 375,000 | | | | 0.52 | | | 5.0 years | | | | 195,000 | |
| Expired | | $ | 1.00 | | | | 3,066,978 | | | $ | 1.00 | | | | (3,066,978 | | | | 1.00 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dec 31, 2008 | | | | | | | 3,741,390 | | | | | | | | 3,741,390 | | | | 0.95 | | | | 3.1 | | | | 2,523,121 | |
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurements
On January 1, 2008, the Company adopted SFAS No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 relates to financial assets and financial liabilities. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities.
SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in GAAP for the definition of fair value, except for the fair value of leased property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions, about market participant assumptions, that are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS 157 are described below:
| | • | | Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| | • | | Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| | • | | Level 3 - Inputs that are both significant to the fair value measurement and unobservable. These inputs rely on management's own assumptions about the assumptions that market participants would use in pricing the asset or liability. (The unobservable inputs are developed based on the best information available in the circumstances and may include the Company's own data.) |
The following table presents the Company's fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008 and 2007:
| | | | | | December 31, 2008 | | | December 31, 2007 | |
| | | Level | | | Fair Value | | | Carrying Amount | | | Fair Value | | | Carrying Amount | |
| Assets | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | | 2 | | | $ | 8,281,899 | | | $ | 8,281,899 | | | $ | 4,753,040 | | | $ | 4,753,040 | |
| Marketable securities | | | 1 | | | | 876,186 | | | | 876,186 | | | | - | | | | - | |
| Accounts receivable | | | 2 | | | | 2,757,685 | | | | 2,757,685 | | | | 2,323,543 | | | | 2,323,543 | |
| Other receivables | | | 3 | | | | 146,025 | | | | 146,025 | | | | 123,631 | | | | 123,631 | |
| Investments | | | 3 | | | | 6,497,470 | | | | 6,497,470 | | | | 2,886,427 | | | | 2,886,427 | |
| Liabilities | | | | | | | | | | | | | | | | | | | | |
| Accounts payable | | | 3 | | | | 749,118 | | | | 749,118 | | | | 659,891 | | | | 659,851 | |
| Accrued expenses | | | 3 | | | | 268,748 | | | | 268,748 | | | | 560,046 | | | | 560,046 | |
Fair Value Option
On January 1, 2008, the Company adopted SFAS No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 provides a fair value option election that allows entities to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value are recognized in earnings as they occur for those assets and liabilities for which the election is made. The election is made on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The adoption of SFAS 159 did not have a material impact on the Company’s financial statements as the Company did not elect the fair value option for any of its financial assets or liabilities.
NOTE 9- MARKETABLE SECURITIES
Available-for-sale marketable securities consisted of the following at December 31, 2008:
| | | Estimated Fair Value | | Gains in Accumulated Other Comprehensive Income | | Losses in Accumulated Other Comprehensive Income | |
| Current: | | | | | | | |
| Common Stock | | $ | 876,186 | | - | | | - | |
| Total current securities | | | 876,186 | | - | | | - | |
| Total available-for-sale securities | | $ | 876,186 | | - | | | - | |
NOTE 10- INVESTMENTS
At December 31, 2008 and 2007, the Company had investments in the following various entities:
| | | 2008 | | | 2007 | |
| Prize Mobile Ltd. | | $ | 1,860,235 | | | $ | - | |
| Probability Games | | | - | | | | 88,755 | |
| XOGO Ltd. | | | 1,314,735 | | | | 487,263 | |
| MDS Software Ltd. | | | - | | | | 520,000 | |
| Rosario Technologies Ltd. | | | 2,572,500 | | | | - | |
| Pharma Digital Solutions Ltd. | | | - | | | | 739,388 | |
| Avatar Gateways | | | 500,000 | | | | - | |
| Scientific Energy | | | - | | | | 801,021 | |
| DG2L Technologies | | | 250,000 | | | | 250,000 | |
| | | | | | | | | |
| Total cost | | $ | 6,497,470 | | | $ | 2,886,427 | |
The Company currently holds less than 10% of each of the respective privately-held entities which approximates the Company’s pro rata share of their underlying value. It is not practicable to estimate the fair value of the Company’s investment in the common stock of these entities because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. However, management believes that the carrying amount was not impaired as of December 30, 2008 and 2007, respectively.
NOTE 11- SUBSEQUENT EVENTS
On February 5, 2009, the Company received approval from a majority of its Series A 6% convertible redeemable preference share investors to repurchase 2,851,686 shares of its common stock pursuant to the December 15, 2008 agreement with an institutional investor.
Kevin Donovan joined the Company as its Chief Executive Officer, effective February 1, 2009. Also effective on February 1 2009, Anna Houssels, a current non-executive member of the Company’s Board of Directors, joined the Company’s executive management team as Vice President of Sales.
Mr Donovan is employed as Chief Executive Officer and Director under agreement commencing February 1 2009 for three years which may be extended by mutual agreement for further one year periods. Basic initial annual remuneration is $260,000 and is subject to annual upward review at the discretion of the Board. He has been awarded 1,500,000 share options vesting over the three years at an exercise price of $0.355. The other terms and conditions of the agreement are considered standard for an appointment of a senior executive.
Ms Houssels is employed as Executive Vice President of International Sales under an agreement dated February 1 2009 for three years which may be extended by mutual agreement for further one year periods. Basic initial annual remuneration is $375,000 and is subject to annual upward review at the discretion of the Board. Ms Houssels is eligible for a bonus on certain sales that she generates over an agreed minimum target determined by the board, and has been awarded 1,500,000 share options vesting over the three years at an exercise price of $0.355. The other terms and conditions of the agreement are considered standard for an appointment of a senior executive.
On December 16, 2008 the company announced that Kevin Donovan will join the Company as its Chief Executive Officer, effective February 1, 2009. Mr. Donovan has over 25 years experience in corporate branding and licensing with prominent entities such as the 2002 Winter Olympics, professional sports properties and entertainment media companies. Also effective on February 1 2009, Anna Houssels, a current non-executive member of the Company’s Board of Directors, will join the Company’s executive management team as Vice President of Sales.
INDEX TO EXHIBITS
| | Certification of Lee Cole, Acting Principal Executive Officer, pursuant to Rule 14(a) or Rule 15(d) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| Exhibit 31.2* | | Certification of Linden J H Boyne, Chief Accounting Officer, pursuant to Rule 14(a) or Rule 15(d) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| Exhibit 32.1* | | Certification of Lee Cole, Acting Principal Executive Officer, pursuant to 18 u.s.c. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| Exhibit 32.2* | | Certification of Linden J H Boyne, Chief Accounting Officer, pursuant to 18 u.s.c. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith
