U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27102
eGames, Inc.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2694937
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2000 Cabot Boulevard West, Suite 110
Langhorne, PA 19047-1811
(address of Principal executive offices)
Issuer's Telephone Number, Including Area Code: 215-750-6606
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report.)
Check whether the issuer (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 ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes ( ) No (X)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 11,724,193 shares of common stock, no
par value per share, as of May 12, 2006.
Transitional Small Business Disclosure Format (check one): Yes ( ) No ( X )
INDEX
Page
Part I. Financial Information ----
Item 1. Unaudited Financial Statements:
Balance Sheet at March 31, 2006 ......................... 3
Statements of Operations for the three and nine months
ended March 31, 2006 and 2005 ....................... 4
Statements of Cash Flows for the nine months
ended March 31, 2006 and 2005 ....................... 5
Notes to Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 12
Item 3. Controls and Procedures ................................. 25
Part II Other Information
Item 6. Exhibit Listing ......................................... 26
Exhibit Index ......................................................... 26
Signatures ......................................................... 27
Exhibits ......................................................... 28
Item 1. Unaudited Financial Statements
eGames, Inc.
Balance Sheet
(Unaudited)
March 31,
ASSETS 2006
- ------ -----------
Current assets:
Cash and cash equivalents $ 1,483,306
Accounts receivable, net 1,009,662
Inventory, net 956,348
Prepaid and other expenses 339,068
-----------
Total current assets 3,788,384
Furniture and equipment, net 30,375
Goodwill 420,000
Intangible assets 24,089
-----------
Total assets $ 4,262,848
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 474,367
Accrued expenses 448,621
-----------
Total current liabilities 922,988
-----------
Stockholders' equity:
Common stock, no par value (40,000,000 shares authorized;
11,956,093 issued and 11,724,193 outstanding) 9,179,827
Additional paid-in capital 2,114,477
Accumulated deficit (7,453,027)
Treasury stock, at cost - 231,900 shares (501,417)
-----------
Total stockholders' equity 3,339,860
-----------
Total liabilities and stockholders' equity $ 4,262,848
===========
See accompanying notes to financial statements.
eGames, Inc.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net sales $ 1,264,898 $ 1,459,623 $ 3,712,963 $ 4,550,082
Cost of sales 711,223 646,116 2,093,648 2,056,508
----------- ----------- ----------- -----------
Gross profit 553,675 813,507 1,619,315 2,493,574
Operating expenses:
Product development 164,788 101,894 376,308 444,887
Selling, general and
administrative 647,875 660,969 1,809,777 1,879,634
----------- ----------- ----------- -----------
Total operating expenses 812,663 762,863 2,186,085 2,324,521
----------- ----------- ----------- -----------
Operating income (loss) (258,988) 50,644 (566,770) 169,053
Interest income, net 11,370 2,007 31,778 4,834
----------- ----------- ----------- -----------
Income (loss) before income taxes (247,618) 52,651 (534,992) 173,887
Provision for income taxes - 0 - 6,483 - 0 - 16,784
----------- ----------- ----------- -----------
Net income (loss) ($ 247,618) $ 46,168 ($ 534,992) $ 157,103
=========== =========== =========== ===========
Net income (loss) per common share:
- Basic ($ 0.02) $ 0.00 ($ 0.05) $ 0.02
====== ====== ====== ======
- Diluted ($ 0.02) $ 0.00 ($ 0.05) $ 0.01
====== ====== ====== ======
Weighted average common shares
outstanding - Basic 11,724,193 10,655,108 11,416,555 10,291,370
Dilutive effect of common share
equivalents - 0 - 375,041 - 0 - 700,962
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - Diluted 11,724,193 11,030,149 11,416,555 10,992,332
========== ========== ========== ==========
See accompanying notes to financial statements.
eGames, Inc.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31,
--------------------------
2006 2005
---------- -----------
OPERATING ACTIVITIES:
- ---------------------
Net income (loss) ($ 534,992) $ 157,103
Adjustment to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Stock-based compensation 58,333 56,972
Depreciation 24,265 27,151
Changes in operating assets and liabilities:
Accounts receivable, net (740,494) 738,025
Inventory, net (62,582) (118,668)
Prepaid and other expenses (25,384) 124,162
Accounts payable 317,775 (240,934)
Accrued expenses 38,981 (265,349)
----------- -----------
Net cash (used in) provided by operating activities (924,098) 478,462
----------- -----------
INVESTING ACTIVITIES:
- ---------------------
Purchases of furniture and equipment (4,758) (11,689)
----------- -----------
Net cash used in investing activities (4,758) (11,689)
----------- -----------
FINANCING ACTIVITIES:
- ---------------------
Dividend payments to common stockholders - 0 - (163,601)
Proceeds from exercise of stock options - 0 - 229,642
----------- -----------
Net cash provided by financing activities - 0 - 66,041
----------- -----------
Net (decrease) increase in cash and cash equivalents (928,856) 532,814
Cash and cash equivalents:
Beginning of period 2,412,162 1,742,224
----------- -----------
End of period $ 1,483,306 $ 2,275,038
=========== ===========
Supplemental cash flow information:
Cash paid (refunds received) for income taxes ($ 34,000) $ 137,040
=========== ===========
See accompanying notes to financial statements.
eGames, Inc.
Notes to Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Description of Business
eGames, Inc. ("eGames", "our", "us", or "we") is a Pennsylvania corporation
incorporated in July 1992 that publishes, markets and sells PC software games.
Historically, we have focused on publishing affordable software games for the PC
platform only, and selling the greatest volume of our PC games in mass-market
retail stores. We have explored the possibility of publishing games for other
gaming platforms, such as consoles and hand-held devices, and have determined at
this time to focus on publishing for the PC platform only because of the greater
amount of cash and other resources that would be required to pursue publishing
titles for other gaming platforms. Our current strategy is to begin shifting our
focus to publishing higher quality, higher-priced PC games, in addition to our
value-priced jewel case PC titles, and look more aggressively at opportunities
to tap into the growing sales of casual and hardcore PC games via the Internet,
in addition to maintaining a strong retail presence. In North America, our PC
games are distributed primarily through third-party software distributors who
service mass-merchant and major retailers. In territories outside North America,
we license our PC games to third-party software distributors who are responsible
for the manufacture and distribution of our PC games within specific geographic
territories. We promote the eGames(TM), Cinemaware(R) and Cinemaware Marquee(TM)
brands in order to generate customer loyalty, encourage repeat purchases and
differentiate our software products to retailers and consumers.
Basis of Presentation
The accompanying unaudited interim financial statements were prepared in
accordance with the instructions to Form 10-QSB and Item 310(b) of Regulation
S-B. Accordingly, these financial statements do not include all information and
disclosures required by generally accepted accounting principles in the United
States for complete financial statements. These financial statements include all
adjustments that management believes are necessary for a fair presentation of
the financial statements. These interim operating results are not necessarily
indicative of the results for a full year. The accompanying financial statements
should be read in conjunction with the audited financial statements and notes
thereto contained in our Form 10-KSB for the fiscal year ended June 30, 2005.
Amounts discussed within the "Notes to Financial Statements" have been rounded
to the nearest thousand ("000") dollars.
Fair Value of Financial Instruments
The recorded amounts of cash and net accounts receivable at March 31, 2006
approximate fair value due to the relatively short period of time between
origination of the instruments and their expected realization. All liabilities
are carried at cost, which approximate fair value for similar instruments.
Cash and Cash Equivalents
For purposes of the statements of cash flows, we consider all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Accounts Receivable, net
Accounts receivable is reflected net of allowances for product returns, price
markdowns and customer bad debts. The adequacy of these allowances is reviewed
throughout each reporting period and any necessary adjustments to these
allowances are reflected within the current period's provisions for product
returns and price markdowns (reflected as a reduction to gross sales); and
customer bad debts (if any, reflected as an operating expense). Actual product
returns, price markdowns and customer bad debts are recorded as reductions to
these allowances as well as reductions to the customers' individual accounts
receivable balances (see Note 2).
Inventory, net
Inventory, net consists primarily of finished goods and is valued at the lower
of cost or market. Cost is determined by the first-in, first-out method (FIFO).
Furniture and Equipment, net
Furniture and equipment, net is stated at cost and net of accumulated
depreciation. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets ranging from three to five years (see Note
5).
Long-Lived Assets, net
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," we record
impairment losses on long-lived assets, including intangible assets, used in
operations when the fair value of those assets, less the cost to sell, is lower
than our carrying value for those assets.
Goodwill and Other Intangible Assets
Goodwill is the excess purchase price paid by an acquiring company for
identified intangible and tangible net assets. Intangible assets usually consist
of trademarks, intellectual property, non-compete agreements, customer lists and
acquired technology. SFAS No. 142, "Goodwill and Other Intangible Assets"
requires that purchased goodwill and intangibles with indefinite lives not be
amortized. Rather, goodwill and intangible assets with indefinite lives are
subject to at least an annual assessment for impairment by applying a
fair-value-based test. SFAS No. 142 requires a two-step approach to testing
goodwill for impairment for each reporting unit. The first step tests for
impairment by applying fair value-based tests at the reporting unit level. The
second step (if necessary), measures the amount of impairment by applying fair
value-based tests to individual assets and liabilities within each reporting
unit.
Revenue Recognition
Product Sales
-------------
We distribute the majority of our products through third-party software
distributors to North American mass-merchant and major retailers and directly to
certain PC software retailers. The distribution of our products is governed by
purchase orders, distribution agreements, or direct sales agreements, most of
which allow for product returns and price markdowns. We recognize revenues from
product shipments to most software distributors and retailers at the time title
to our inventory transfers to the distributor or retailer, less a provision for
anticipated product returns and price markdowns. However, if we determine that
we are not able to estimate an appropriate provision for product returns and
price markdowns for any retailer or distributor, we then recognize revenues for
product deliveries to these retailers or distributors on a consignment basis.
Title to our products usually transfers to software distributors and retailers
upon their receipt of our products, because retailer and distributor purchase
orders typically reflect shipping terms of FOB destination. In order to
recognize revenues associated with customer purchase orders having terms of FOB
destination, we perform sales cut-off tests, in which we obtain proof of
deliveries for product shipments made during the last two weeks of a reporting
period from the freight companies that deliver our products to our retail and
distribution customers. Revenues and costs associated with product shipments
received by our customers after the end of a reporting period and having FOB
destination terms are excluded from the current period's operating results and
are deferred until the subsequent reporting period.
We recognize revenues in accordance with the criteria of SFAS No. 48 at the time
title to our inventory passes to software distributors or retailers, based on
the following: the selling price is fixed at the date of sale; the buyer is
obligated to pay us; title of the product transfers to the buyer; the buyer has
economic substance apart from us; we do not have further obligations to assist
the buyer in the resale of the product; and product returns and price markdowns
can be reasonably estimated at the time of sale. After product deliveries to our
distribution and retail customers are made, we do not provide any further
services or materials that are essential to our products' functionality.
However, we do provide basic telephone and web-based support as a means of
improving consumer satisfaction and brand loyalty.
We also have relationships with certain software distributors for product
distribution to various retailers based on consignment and sell-through
agreements. Accordingly, revenues from product shipments pursuant to these types
of agreements are only recognized to the extent that the distributor has
reported to us that our product has actually sold through to consumers.
Provision for Product Returns and Price Markdowns
-------------------------------------------------
Our provision for anticipated product returns and price markdowns (reflected as
a reduction to gross sales) is primarily based on our analysis of: historical
product return and price markdown results; current product sell-through activity
at retail store locations; current field inventory quantities at distributors'
warehouses and at retail store locations; the length of time that products have
been released at retail along with their estimated remaining retail life;
outstanding return material and price markdown authorizations; the introduction
of new and/or competing software products that could negatively impact the sales
of one or more of our current products; and the extent to which quantities of
products with higher retail price points or unproven game genres remain in the
retail channel.
The adequacy of our allowance for product returns and price markdowns is
reviewed throughout each reporting period and any necessary adjustment to this
allowance is reflected within the current reporting period's provision. At the
end of each reporting period, the allowance for product returns and price
markdowns is reflected as a reduction to our gross accounts receivable.
At March 31, 2006, the allowance for product returns and price markdowns
amounted to 39% of our gross accounts receivable. Historically, the allowance
for product returns and price markdowns has represented a large percentage of
our gross accounts receivable because we continue to have product return and
price markdown exposure for the software units related to paid receivables while
these units remain in the retailers' stores or in the retailers' or
distributors' warehouses. Until physical software units sell through to
consumers, or are returned to us, we continue to evaluate our product return or
price markdown exposure for these previously sold units while these units remain
in the retail channel. During reporting periods, through retailer and
distributor provided reports, we have regular and timely visibility of product
sell-through activity and remaining quantities of our titles in the retail
channel that help us assess our exposure for future product returns and price
markdowns.
Prepaid and Other Expenses
Prepaid and other expenses represent advance payments made to third parties for
items such as licensing of software and intellectual properties used in our
products, estimated tax payments, certain insurance coverage, retail market
reporting, certain advertising costs and various service contracts. Prepaid and
other expenses are usually expensed as operating expenses on a straight-line
basis over the period of time covered by a contract. Advance licensing and
royalty payments are usually expensed as cost of sales at the higher of the
contractual or effective rate (see Notes 4 and 7). Tax payments are reflected as
income tax expense when appropriate.
We continually evaluate the recoverability of our advanced licensing and royalty
payments by reviewing the information available about each title and the
underlying licensed content. In particular, we evaluate the expected future
sales of a title or potential subsequent titles containing the same licensed
content based on current and potential sales programs, along with historical
sell-through results of similar titles to consumers. For titles that have
achieved distribution into their intended retail channels, we charge to cost of
sales the remaining capitalized costs we determine to be non-recoverable in
future periods. In the rare circumstance that a title does not achieve
distribution into its intended retail channels, we charge to product development
expense the remaining capitalized costs we determine to be non-recoverable in
future periods. Capitalized costs determined to be non-recoverable are expensed
in the reporting period in which the decision is reached by management that
recoverability of these costs in future periods is unlikely.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and for net operating loss and credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled.
Computation of Net Income (Loss) per Common Share
Net income (loss) per common share is computed in accordance with SFAS No. 128,
"Earnings per Share". Basic earnings per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
each period. Diluted earnings per share is computed by dividing net earnings by
the weighted average number of common shares and common share equivalents
("CSE's") outstanding during each period that we report net income. CSE's may
include stock options and warrants using the treasury stock method.
Management's Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities. Estimates and assumptions are made in: determining allowances for
inventory obsolescence, product returns, price markdowns and customer bad debts;
disclosure of contingent assets and liabilities; initial valuation and
subsequent measurement of goodwill and other intangible assets; evaluating the
recoverable value of advanced licensing and royalty payments at the end of the
reporting period; in addition to determining the amounts of revenues and
expenses recognized during each reporting period. We recognize the critical
nature and potential impact from making these and any other estimates and
attempt to make reliable estimates, based upon the information available to us
as of any reporting period. However, we also recognize that actual results could
differ from any of our estimates and that such differences could have either a
negative or positive impact on future financial results.
2. Accounts Receivable, net
Accounts receivable, net consists of the following:
Accounts receivable, gross $ 1,658,000
Allowance for product returns and price markdowns (648,000)
------------
Accounts receivable, net $ 1,010,000
============
3. Inventory, net
Inventory, net consists of the following:
Raw materials - warehouse $ 265,000
Finished goods - warehouse 636,000
Finished goods - consignment 160,000
Product returns - retailer and distributor locations 62,000
------------
Inventory, gross 1,123,000
Allowance for obsolescence (167,000)
------------
Inventory, net $ 956,000
============
4. Prepaid and Other Expenses
Prepaid and other expenses consist of the following:
Royalties $ 163,000
Federal tax 58,000
Insurances 56,000
Other expenses 27,000
Retail market reporting 25,000
Prepaid advertising 10,000
------------
Prepaid and other expenses $ 339,000
============
5. Furniture and Equipment, net
Furniture and equipment consists of the following:
Furniture and equipment, gross $ 363,000
Accumulated depreciation (333,000)
------------
Furniture and equipment, net $ 30,000
============
6. Accrued Expenses
Accrued expenses consist of the following:
Vacation accrual $ 109,000
Marketing promotions 84,000
Royalties 60,000
Professional fees 50,000
Customer credit balances 40,000
Relocation and travel 34,000
State taxes 28,000
Other 24,000
Charities 20,000
------------
Accrued expenses $ 449,000
===========
7. Commitments and Contingencies
Our 5,000 square foot office facility located in Langhorne, Pennsylvania is
occupied under an operating lease through September 30, 2010. Additionally, we
currently rent certain office equipment through various operating lease
agreements. For the quarters ended March 31, 2006 and 2005, total rent expense
amounted to $21,000 for both quarters. During the nine months ended March 31,
2006 and 2005, total rent expense amounted to $66,000 and $64,000, respectively.
At March 31, 2006, we had future operating lease commitments of $238,000
scheduled to be paid as follows: $64,000 in less than one year; $152,000 in one
to three years; and $22,000 in three to five years.
Under various licensing agreements with third-party software developers, we are
required to pay royalties for the use of licensed content in our products. Most
of these licensing agreements require us to make advance royalty payments to
these developers prior to the time we recognize any net sales of software titles
containing this licensed software content. As of March 31, 2006, we had future
commitments to pay $88,000 in advance licensing and royalty payments in less
than one year to various third-party licensors and software developers.
As part of a public relations campaign intended to support and promote our
brands and the retail releases of our new higher priced PC game titles, at March
31, 2006 we had $22,000 in commitments relating to a professional services
agreement with a public relations firm.
8. Credit Facility
In December 2005, we renewed our credit facility agreement with Hudson United
Bank ("HUB"), which matures on December 1, 2006. This credit facility was
established to provide working capital for our operations. Amounts outstanding
under this credit facility are charged interest at one-half of one percent above
HUB's current prime rate and such interest is due monthly. Our access to these
funds is limited to the lesser of $750,000 or seventy-five percent of qualified
accounts receivable, which are defined as invoices less than ninety days old and
net of any allowances for product returns, price markdowns and customer bad
debts. As of March 31, 2006, we had not utilized any of this credit facility,
and we had access to the full $750,000 amount under this credit facility, based
on the prescribed calculation of seventy-five percent of qualified accounts
receivable as of that date. The credit facility is secured by all of the
Company's assets and requires us, among other things, to maintain certain
financial covenants that are tested quarterly.
9. Concentration of Customers
We continue to have a concentration of customers consisting of a few large
software distributors and retailers. Historically, Atari, Inc. ("Atari") has
represented our primary software distributor servicing the North American
mass-merchants and other major retailers. In December 2005, we began to
transition the majority of our mass-merchant retail distribution to Take-Two
Interactive Software ("Take Two"), which has distributed our titles into the
office superstore and discount warehouse retail channels for several years.
During the three months ended March 31, 2006, Atari accounted for $277,000 of
net sales, or 22% of net sales, compared to the three months ended March 31,
2005, when Atari accounted for $804,000 of net sales, or 55% of net sales.
During the three months ended March 31, 2006, Take Two accounted for $281,000 of
net sales, or 22% of net sales, compared to the three months ended March 31,
2005, when Take Two accounted for $61,000 of net sales, or 4% of net sales. We
anticipate that Take Two will continue representing a growing percentage of our
net sales and net accounts receivable in future periods, while at the same time
Atari's share of our business will most likely continue to decline.
During the nine months ended March 31, 2006, Atari accounted for $1,200,000 of
net sales, or 32% of net sales, compared to the nine months ended March 31,
2005, when Atari accounted for $2,281,000 of net sales, or 50% of net sales.
During the nine months ended March 31, 2006, Take Two accounted for $405,000 of
net sales, or 11% of net sales, compared to the nine months ended March 31,
2005, when Take Two accounted for $178,000 of net sales, or 4% of net sales. At
March 31, 2006, Atari's net receivable balance was $151,000, or 15% of our total
net accounts receivable, compared to Take Two's net accounts receivable of
$322,000, or 32%, of our total net accounts receivable.
10. Accounting for Stock-Based Compensation
Effective July 1, 2002, we adopted within our financial statements the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" by
applying the fair value method prospectively for stock options grants made on or
after that date. On January 1, 2003, we adopted the provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure". During
the three months ended March 31, 2006 and 2005, we recognized stock-based
compensation expense within our financial statements of $21,000 and $20,000,
respectively, and during the nine months ended March 31, 2006 and 2005, we
recognized stock-based compensation expense within our financial statements of
$58,000 and $57,000, respectively.
11. Operations by Reportable Segment and Geographic Area
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", establishes standards for reporting information about an
enterprise's operating segments and related disclosures about products,
geographic areas and major customers.
Based on our organizational structure, we operate in only one geographic area,
which is North America, and only one reportable segment, which is publishing
consumer entertainment gaming software titles.
12. Goodwill and Other Intangible Assets
At March 31, 2006, we had goodwill of $420,000, which related to the acquisition
of substantially all of the assets of Cinemaware, Inc. in October 2005. The
acquired assets consisted principally of goodwill, intellectual property and
contract rights. We intend to use the acquired Cinemaware assets for developing,
publishing and branding higher-priced game titles for the PC and possibly for
other gaming platforms in the future. In consideration for the Cinemaware
assets, eGames issued to Cinemaware 817,439 shares of its common stock valued at
$300,000 based on the average closing stock price of the eGames' common stock
for the ten trading days that ended on October 12, 2005 and warrants (valued at
$120,000 using the Black-Scholes valuation model) to purchase 300,000 shares of
eGames common stock. At March 31, 2006, we also had other intangible assets of
approximately $24,000 relating to the Company's trademark registration
activities with the United States Patent and Trademark Office. As of March 31,
2006, we had not recorded any expense relating to goodwill or other intangible
assets based upon our evaluation that no impairment has occurred.
13. Advertising Costs
We generally expense advertising costs (such as in-store circulars and point of
sale materials) as incurred, except for production costs associated with media
campaigns (such as print ads, online banner ads and video loops) which would be
recognized as prepaid assets (to the extent these items were paid in advance)
and expensed during the period in which the ad or video loop is first released
to consumers. During the three months ended March 31, 2006 and 2005, advertising
expenses totaled $27,000 and $9,000, respectively. During the nine months ended
March 31, 2006 and 2005, advertising expenses amounted to $32,000 and $25,000,
respectively.
14. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" which revised SFAS No. 123, "Accounting for Stock-Based
Compensation". This statement supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". The revised statement addresses the accounting for
share-based payment transactions with employees and other third parties,
eliminates the ability to account for share-based compensation transactions
using APB 25 and requires that the compensation expense relating to such
transactions be recognized in the statement of operations. The revised statement
became effective during the first interim period beginning after June 15, 2005.
The adoption of SFAS No. 123 (revised 2004) did not have a material impact on
our financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in Accounting
Research Bulletin ("ARB") No. 43, "Restatement and Revision of Accounting
Research Bulletins", Chapter 4, "Inventory Pricing", to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) and requires that those items be recognized as
current-period charges. SFAS No. 151 also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 became effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS
No. 151 did not have a material impact on our financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements made in this Quarterly Report on
Form 10-QSB, other than statements of historical fact, including statements
regarding industry prospects and future results of operations or financial
position, are forward looking. We use the words "believe", "expect",
"anticipate", "intend", "will", "should", "may" and similar expressions to
identify forward-looking statements. These forward-looking statements are
subject to business volatility, economic risk, and world events, which are
inherently uncertain and difficult to predict. Our actual results could differ
materially from management's expectations due to such risks. We will not
necessarily update information if any forward-looking statement later turns out
to be inaccurate. In particular, these forward-looking statements include, among
others, statements about:
- Our shifting focus to publishing higher quality, higher-priced PC
game titles, and looking more aggressively at opportunities to
sell our titles via the Internet;
- The continuing impact on our financial results of decreasing
retail shelf space for value-priced PC games and increased
competition in this category;
- Our anticipated release of two higher-priced PC titles during our
fourth fiscal quarter;
- Our expectation that product development expenses, licensing
fees and advance royalty payments will increase compared to
prior periods and we will incur higher costs for promotional
efforts in future periods as we publish higher-priced PC
game titles, and seek to develop our own titles;
- Our attempts to seek incremental revenues through licensing,
alternative retail channels and in-statement advertisers;
- Our expectation that Take Two Interactive will continue
representing a growing percentage of our net sales and net
accounts receivable in future periods, while at the same time
Atari's share of our business will most likely continue to
decline;
- Our plans to expand Internet sales by significantly revamping our
existing websites into a gaming destination `portal;'
- Our expectation that we will continue to receive product returns
from retailers that are then sold to inventory liquidators at
discounted prices;
- Our provision for product returns and price markdowns, as a
percentage of related gross sales, trending higher for the
foreseeable future;
- Our expectation that we will incur sales incentives and
promotional costs from software distributors and retailers
at an increasing rate for the foreseeable future;
- Our expectation that we will continue to dispose of excess and
slow moving inventory through our liquidation and discount
channels;
- The impact on our liquidity if Atari or Take Two were unable or
unwilling to make receivable payments to us in a timely manner;
- Continued monitoring of Atari's payment trends to us in order to
avoid unanticipated collection issues as our distribution
through Atari decreases;
- Increased competition for retail shelf space for mid-range priced
PC games to which we intend to shift our focus; and
- The possibility that we may need to seek additional funds to
provide financing for our strategy of publishing higher quality,
and higher-priced, game titles for the PC.
The following important factors, as well as those factors discussed under
"Factors Affecting Future Performance" in our Form 10-KSB for the fiscal year
ended June 30, 2005, could cause our actual results to differ materially from
those indicated by the forward-looking statements contained in this report:
- the market acceptance and successful sell-through results for our
value priced and mid-range priced products at retail stores and
via the Internet;
- the continued successful business relationship between us and our
primary distributors to major mass-market retailers;
- the amount of shelf space major mass-market retailers allocate to
our products;
- the amount of unsold product that is returned to us by retailers
and distributors;
- the amount of price markdowns granted to retailers and
distributors;
- our ability to accurately estimate the amount of product returns
and price markdowns that will occur and the adequacy of the
allowances established for such product returns and price
markdowns;
- our ability to collect outstanding accounts receivable and
establish an adequate allowance for customer bad debts;
- the ability to deliver products in response to customer orders
within a commercially acceptable time frame;
- downward pricing pressure;
- fluctuating costs of developing, producing, distributing and
marketing our products;
- our ability to license or develop quality content for our products
on commercially-viable terms;
- our ability to develop new higher-priced products and successfully
enter the new market segment for higher-priced products;
- our ability to control our costs and expenses in connection with
implementing our new strategy;
- our ability to fund our strategy of publishing higher quality and
higher-priced game titles for the PC and developing our own PC
game titles;
- and increased competition.
Overview
The following overview identifies certain recent trends and events in our
business. We believe that an understanding of these trends and events is
important in order to understand our results for the three and nine months ended
March 31, 2006, as well as our future results. This overview is not intended to
be exhaustive, nor is it intended to be a substitute for the detailed discussion
and analysis provided elsewhere in this Form 10-QSB, including the remainder of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," or the financial statements and the related notes. Amounts, other
than percentages, discussed within the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" have been rounded to the nearest
thousand ("000") dollars.
About eGames
eGames, Inc. ("eGames", "our", "us", or "we") is a Pennsylvania corporation
incorporated in July 1992 that publishes, markets and sells PC software games.
Historically, we have focused on publishing affordable software games for the PC
platform only, and selling the greatest volume of our PC games in mass-market
retail stores. We have explored the possibility of publishing games for other
gaming platforms, such as consoles and hand-held devices, and have determined at
this time to focus on publishing for the PC platform only because of the greater
amount of cash and other resources that would be required to pursue publishing
titles for other gaming platforms. Our current strategy is to begin shifting our
focus to publishing higher quality, higher-priced PC games, in addition to our
value-priced jewel case PC titles, and to look more aggressively at
opportunities to tap into the growing sales of casual and hardcore PC games via
the Internet, in addition to maintaining a strong retail presence. In North
America, our PC games are distributed primarily through third-party software
distributors who service mass-merchant and major retailers. In territories
outside North America, we license our PC games to third-party software
distributors who are responsible for the manufacture and distribution of our PC
games within specific geographic territories. We promote the eGames(TM),
Cinemaware(R) and Cinemaware Marquee(TM) brands in order to generate customer
loyalty, encourage repeat purchases and differentiate our software products to
retailers and consumers.
Significant Trends and Events in our Business
Publishing of Higher Quality and Higher-Priced Games for the PC
---------------------------------------------------------------
Our current strategy is to offset the impact from the decrease in retail shelf
space being allocated to value-priced PC software by publishing higher quality,
higher-priced PC game titles. During our third fiscal quarter, we released three
higher-priced PC titles, Space Rangers 2: Rise of the Dominators, Buccaneers
Bounty, and Neighbors From Hell: On Vacation, under our new brand, Cinemaware
Marquee. During the fourth fiscal quarter, we expect to release two higher
priced PC titles, Darwinia and Moscow to Berlin: Red Siege, both under the
Cinemaware Marquee brand. We expect our future product development costs to
increase compared to prior periods, due to the increased complexity of game play
and additional quality control procedures that are required to bring to market
these more technically sophisticated games. We also expect these costs to
increase as we implement plans to begin to develop our own new game titles,
using both external and internal development resources. Additionally, higher
quality software content for these gaming platforms generally requires higher
licensing fees and advance royalty payments, and we therefore expect our future
licensing and advanced royalty payments to significantly increase over prior
periods and represent a greater use of available cash as we bring such products
to market. As we begin to publish higher priced titles for the PC, we expect to
incur greater costs and cash expenditures for promotional efforts, such as print
ads, online banner ads, in-store circulars, video loops, public relations and
slotting fees, to support the retail and online releases of these higher quality
titles competing at higher price points.
Decrease in Retail Shelf Space for Value-Priced PC Software Combined with
Increased Competition in this Market Segment Has Impacted Our Sales
-------------------------------------------------------------------
The reduced amount of shelf space allocated to our category of products in
retail stores has continued to impact our net sales. We continue to see
indications that the amount of retail shelf space being allocated to PC software
games at the $9.99 retail price point is decreasing, and we expect this trend to
continue negatively impacting our results for the foreseeable future.
Additionally, competition in the core value-priced casual game genres has
increased in recent periods, which has also had an impact on our net sales as it
becomes more competitive to secure retail shelf positions for these titles. We
continue to seek incremental licensing opportunities and pursue increased sales
at alternative retail channels such as discount retailers and in-statement
advertising providers. We are also seeking to license or develop higher-priced,
unique casual game content in order to compete more effectively in these
markets. We cannot predict whether these initiatives will be effective in
increasing net sales.
Concentration of Customers
--------------------------
We continue to have a concentration of customers consisting of a few large
software distributors and retailers. Historically, Atari, Inc. ("Atari") has
represented our primary software distributor servicing the North American
mass-merchants and other major retailers. In December 2005, we began to
transition the majority of our mass-merchant retail distribution to Take-Two
Interactive Software ("Take Two"), which has distributed our titles into the
office superstore and discount warehouse retail channels for several years.
During the three months ended March 31, 2006, Atari accounted for $277,000 of
net sales, or 22% of net sales, compared to the three months ended March 31,
2005, when Atari accounted for $804,000 of net sales, or 55% of net sales.
During the three months ended March 31, 2006, Take Two accounted for $281,000 of
net sales, or 22% of net sales, compared to the three months ended March 31,
2005, when Take Two accounted for $61,000 of net sales, or 4% of net sales. We
anticipate that Take Two will continue representing a growing percentage of our
net sales and net accounts receivable in future periods, while at the same time
Atari's share of our business will most likely continue to decline.
During the nine months ended March 31, 2006, Atari accounted for $1,200,000 of
net sales, or 32% of net sales, compared to the nine months ended March 31,
2005, when Atari accounted for $2,281,000 of net sales, or 50% of net sales.
During the nine months ended March 31, 2006, Take Two accounted for $405,000 of
net sales, or 11% of net sales, compared to the nine months ended March 31,
2005, when Take Two accounted for $178,000 of net sales, or 4% of net sales. At
March 31, 2006, Atari's net receivable balance was $151,000, or 15% of our total
net accounts receivable, compared to Take Two's net accounts receivable of
$322,000, or 32%, of our total net accounts receivable.
Critical Accounting Policies and Estimates
Our significant accounting policies and methods used in the preparation of the
Financial Statements are discussed in Note 1 of the Notes to Financial
Statements. We believe our policies for revenue recognition, inventory valuation
and recoverability of advanced licensing and royalty payments require us to make
significant judgments and estimates that could materially affect the amount of
revenue we recognize, the cost of sales we expense, and the reported net values
for inventory, accounts receivable, prepaid and other expenses. Our discussion
and analysis of our financial condition and results of operations are based upon
our financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make judgments and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates for product returns, price markdowns, customer bad debts,
inventory obsolescence, recoverable values of advanced licensing and royalty
payments, income tax expense, contingencies and litigation risks. We base our
estimates on historical experience and on various other factors and assumptions
that we believe are appropriate. Actual results may differ from these estimates
under different assumptions or conditions.
Revenue Recognition (Net Sales, Product Returns and Price Markdowns)
--------------------------------------------------------------------
We distribute the majority of our products through third-party software
distributors to North American mass-merchant and major retailers and directly to
certain PC software retailers, most of which have traditionally sold consumer
entertainment PC software titles. The distribution of our products is governed
by purchase orders, distribution agreements or direct sale agreements, most of
which allow for product returns and price markdowns and have shipping terms of
FOB destination. For product shipments to most software distributors and
retailers, we record a provision for product returns and price markdowns as a
reduction to gross sales at the time the title of our product transfers to the
distributor or retailer. However, if we determine that we are not able to
estimate an appropriate provision for product returns and price markdowns for
any retailer or distributor, we then recognize revenues for product deliveries
to these retailers or distributors on a consignment basis as described below.
We also have relationships with certain software distributors for product
distribution to various retailers based on consignment and sell-through
agreements. Accordingly, revenues from product shipments pursuant to these types
of agreements are only recognized to the extent that the distributor has
reported to us that our product has actually sold through to consumers.
Key Assumptions
Our provision for anticipated product returns and price markdowns is based on
the assumptions we make after evaluating various factors, including: our
analysis of historical product return and price markdown results; current
product sell-through activity at retail store locations; current field inventory
quantities at distributors' warehouses and at retail store locations; the length
of time that products have been released at retail along with their estimated
remaining retail life; the introduction of new and/or competing software
products that could negatively impact the sales of our current products;
outstanding return material and price markdown authorizations; and the extent to
which units of products with higher price points or unproven genres remain in
the retail channel.
The adequacy of our allowance for product returns and price markdowns is
reviewed throughout each reporting period and any necessary adjustment to this
allowance is reflected within the current reporting period's provision.
Significant management judgments and estimates must be made and used in order to
determine how much revenue can be recognized in any reporting period. Material
differences may result in the amount and timing of our revenue for any period if
management's judgments or estimates for product returns or price markdowns prove
to be insufficient or excessive compared to actual results.
Inventory Valuation
-------------------
Our inventory valuation policy requires management to make estimates and
assumptions about the recoverability of the carrying value of inventory at the
end of each reporting period and cost of sales expensed during each reporting
period. The individual components of our software titles that are usually
reflected in our net inventory valuation include some combination of the
manufactured costs of: CD's; jewel cases; box packaging; print materials;
manuals; posters; novelty items; assembly; and other miscellaneous items
particular to specific titles. Our inventory could be valued differently at the
close of any reporting period and the amount of expense recorded as cost of
sales during any reporting period could differ, if management's judgments or
estimates of provisions for the potential impairment of inventory value are
insufficient or excessive when compared to actual results.
Key Assumptions
Our provision for inventory obsolescence is based on the assumptions we make
after evaluating the remaining value of existing inventory units (consisting of
unsold warehouse units, consignment units and estimated product return units),
which involves: assessing the remaining product life of existing titles based on
how long the titles have been released at retail; analyzing the trend of current
product sell-through activity to consumers for existing titles; identification
of competitors' new products with greater capabilities or more recognizable
brands that could replace or shorten the lifecycles of our existing titles;
assessing the potential for litigation that may affect our ability to sell
existing titles containing certain product content; monitoring expiration dates
of licensing agreements with software developers for content within existing
titles; and tracking the current market value for remaining units of
discontinued titles based on recent sales of similar products to inventory
liquidators and discount retailers.
Although we attempt to accurately match production requirements of our products
to forecasted consumer demand, at the end of a product's lifecycle we usually
have some level of excess inventory units that need to be disposed of through
liquidation sales. If we cannot liquidate such inventory, or if we are unable to
sell any remaining units due to legal or other reasons, we would then write down
the remaining inventory value to zero. The adequacy of our allowance for
inventory obsolescence is reviewed throughout each reporting period, and any
adjustments are reflected in the current period's provision for inventory
obsolescence.
Advance Licensing and Royalty Payments
--------------------------------------
We make advance licensing and royalty payments to third party software
developers and other licensors for the licensing of software content and
intellectual properties for use within our PC software titles. These advance
payments are initially classified on our balance sheet as "Prepaid and other
expenses", and are then usually expensed within the "Cost of sales" category of
our Statements of Operations at the greater of the contractual or effective
royalty rate.
Key Assumptions
We continually evaluate the recoverability of our advance licensing and royalty
payments by reviewing the information available about each title and the
underlying licensed content in existing titles. In particular, we evaluate the
potential future sales of a title or subsequent titles containing the same
licensed content based on current and potential sales programs, along with
historical sell-through results of a title and similar titles, if any, to
consumers. For titles that have achieved distribution into their intended retail
channels, we charge to cost of sales the remaining costs we determine to be
non-recoverable in future periods. In the rare circumstance that a title does
not achieve distribution into its intended retail channels, we charge to product
development expense the remaining costs we determine to be non-recoverable in
future periods. Non-recoverable costs are expensed in the reporting period in
which management determines that it is not likely that we will be able to
recover these costs in future periods.
Results of Operations
The following discussion should be read together with our Financial Statements
and Notes beginning on page 3.
Three and Nine Months Ended March 31, 2006 and 2005
Net Sales
For the three months ended March 31, 2006, net sales decreased by $195,000, or
13%, to $1,265,000, compared to $1,460,000 for the same quarter a year earlier.
This decrease in net sales resulted from a $172,000 decrease in net sales to
North American software distributors, and primarily related to the declining
distribution of eGames' value-priced line of PC software games, compared to the
year ago quarter, which resulted from a substantial reduction in retail shelf
space allocated to PC software games at the $9.99 retail price point. As a
result of these changes at retail, demand for the eGames value-priced PC titles
has continued to decrease as competition for title placement in these reduced
retail PC software sections has dramatically increased.
For the nine months ended March 31, 2006, net sales decreased by $837,000, or
18%, to $3,713,000, compared to $4,550,000 for nine months ended March 31, 2005.
This decrease in net sales resulted from a $968,000 decrease in net sales to
North American software distributors (due to similar factors impacting the three
month results), which was partially offset by a $77,000 increase in net sales
made directly to various North American retailers and a $71,000 increase in
licensing revenues.
The following table represents the Company's net sales by distribution channel
for the three and nine months ended March 31, 2006 and 2005, respectively:
Net Sales by Distribution Channel
(rounded to the nearest thousand)
---------------------------------
Three Months Ended
March 31,
--------------------------------------
Increase %
Distribution Channel 2006 % 2005 % (Decrease) Change
- -------------------------------------------------------------------------------------------
Software Distributors $ 845,000 67% $ 1,017,000 70% ($ 172,000) (17%)
Software Retailers 162,000 13% 135,000 9% 27,000 20%
Licensing 157,000 12% 176,000 12% (19,000) (11%)
Internet 68,000 5% 96,000 7% (28,000) (29%)
Inventory Liquidators 33,000 3% 36,000 2% (3,000) (8%)
- -------------------------------------------------------------------------------------------
Totals $ 1,265,000 100% $ 1,460,000 100% ($ 195,000) (13%)
=========== ==== =========== ==== ========= ===
Nine Months Ended
March 31,
--------------------------------------
Increase %
Distribution Channel 2006 % 2005 % (Decrease) Change
- -------------------------------------------------------------------------------------------
Software Distributors $ 2,306,000 62% $ 3,274,000 72% ($ 968,000) (30%)
Software Retailers 510,000 14% 433,000 10% 77,000 18%
Licensing 494,000 13% 423,000 9% 71,000 17%
Internet 212,000 6% 242,000 5% (30,000) (12%)
Inventory Liquidators 191,000 5% 178,000 4% 13,000 7%
- -------------------------------------------------------------------------------------------
Totals $ 3,713,000 100% $ 4,550,000 100% ($ 837,000) (18%)
=========== ==== =========== ==== ========= ===
Software Distributors
---------------------
For the three months ended March 31, 2006, net sales to software distributors
that serve North American mass-merchants and other retailers amounted to
$845,000, which represented a decrease of $172,000 or 17% compared to the three
months ended March 31, 2005. This decline in net sales to software distributors
was caused primarily by a $527,000 decrease in net sales to Atari, which was
partially offset by a $220,000 net sales increase to Take Two, along with net
sales increases to our Canadian software distributors of $83,000 and various
other software distributors totaling $52,000. These net sales changes resulted
from a declining amount of retail shelf space being allocated to value-priced PC
games, our recent transition from Atari to Take Two as our primary North
American distributor, and improved Canadian distribution, compared to the same
quarter last year.
For the nine months ended March 31, 2006, net sales to software distributors
that serve North American mass-merchants and other retailers amounted to
$2,306,000, which represented a decrease of $968,000 or 30% compared to the nine
months ended March 31, 2005. This decline in net sales to software distributors
resulted from net sales decreases of $1,081,000 to Atari and $125,000 to
Canadian software distributors, which net sales decreases were partially offset
by a $227,000 net sales increase to Take Two.
Software Retailers
------------------
For the three months ended March 31, 2006, net sales made directly to software
retailers totaled $162,000, representing a $27,000 increase compared to the
three months ended March 31, 2005. This increase resulted primarily from a
$37,000 net sales increase to CompUSA, which was partially offset by a $10,000
net sales decrease to various retailers.
For the nine months ended March 31, 2006, net sales made directly to software
retailers totaled $510,000, representing a $77,000 increase compared to the nine
months ended March 31, 2005. This net sales increase was due to a $177,000
increase in net sales to various discount retailers, which was partially offset
by a $46,000 net sales decrease to CompUSA and a $54,000 net sales decrease to
various other retailers.
Licensing
---------
For the three months ended March 31, 2006 and 2005, we realized licensing
revenues of $157,000 and $176,000, respectively, which represented 12% of net
sales for both quarters. This $19,000 decrease in licensing revenues resulted
from a $69,000 decrease in international licensing revenues, which was partially
offset by a $50,000 increase in licensing revenues generated in the United
States.
For the nine months ended March 31, 2006 and 2005, we realized licensing
revenues of $494,000 and $423,000, respectively, which represented 13% and 9%,
respectively, of net sales. This $71,000 increase in licensing revenues related
to increased licensing revenues generated in the United States, partially offset
by lower international licensing revenues.
Internet
--------
For the three months ended March 31, 2006 and 2005, Internet sales were $68,000
and $96,000, respectively, and for the nine months ended March 31, 2006 and
2005, Internet sales were $212,000 and $242,000, respectively. Additionally,
over the next nine months we plan to explore opportunities to expand our
Internet sales by significantly revamping our existing websites into a gaming
destination 'portal'.
Inventory Liquidators
---------------------
Net sales to inventory liquidators consist of sales of residual inventory units
of titles that have been discontinued (in part or entirely) at traditional
software retail stores. As retailers routinely change the mix of software titles
displayed on their store shelves, we expect to continue receiving discontinued
titles back from the retail channel that will then need to be liquidated, along
with any quantities of those titles remaining in our warehouse. The amount of
inventory liquidation sales vary, period to period, and are usually made at
discounted prices with no right of product return or price markdown.
For the three months ended March 31, 2006 and 2005, net sales to inventory
liquidators were $33,000 and $36,000, respectively, while for the nine months
ended March 31, 2006 and 2005, net sales to inventory liquidators were $191,000
and $178,000, respectively.
Product Returns and Price Markdowns
-----------------------------------
Until physical units of our products are returned to us from software
distributors or retailers, or until these units sell through to consumers, we
continue to evaluate our product return and price markdown exposure for the
software units we previously sold to software distributors and retailers. Based
on various assumptions, including shorter product lifecycles, more competitive
titles in our core game genres, continued reduction of retail shelf space
allocated to $9.99 retail priced PC software games and our plan to continue
publishing more higher priced PC games in upcoming periods, we anticipate our
provision for product returns and price markdowns, as a percentage of related
gross sales, to trend higher for the foreseeable future.
During the three months ended March 31, 2006 and 2005, our provision for product
returns and price markdowns relating to gross product sales to software
distributors and retailers amounted to $277,000 and $338,000, respectively, or
19.0% and 20.6%, respectively, of related gross product sales.
During the nine months ended March 31, 2006 and 2005, our provision for product
returns and price markdowns relating to gross product sales to software
distributors and retailers amounted to $753,000 and $978,000, respectively, or
18.2% and 18.8%, respectively, of related gross product sales.
Sales Incentives and Promotional Costs
--------------------------------------
In order to maintain retail shelf space for our titles at certain retailers, we
incur sales incentives and promotional fees from software distributors and
retailers, such as distributor pricing rebates and retailer slotting fees, which
are recognized as reductions to gross sales. We anticipate that sales to
software retailers and distributors that charge such fees will continue to
increase, relative to those retailers and distributors that do not charge such
fees, and so we expect to incur these types of reductions to gross sales at an
increasing rate for the foreseeable future.
For the three months ended March 31, 2006 and 2005, our sales incentives and
promotional costs were $139,000 and $113,000, respectively, or 9.5% and 6.9%,
respectively, of related gross product sales.
For the nine months ended March 31, 2006 and 2005, our sales incentives and
promotional costs were $379,000 and $353,000, respectively, or 9.2% and 6.8%,
respectively, of related gross product sales.
Cost of Sales
Cost of sales consists of the following costs that are associated with
publishing PC games: product costs; royalty costs incurred with third parties
for licensing product content or other intellectual properties; freight and
handling costs; inventory obsolescence provision, and other costs such as
tooling, labeling, sorting and reclamation.
The following table represents our cost of sales for the three and nine months
ended March 31, 2006 and 2005:
March 31, % of March 31, % of Increase %
2006 net sales 2005 net sales (Decrease) Change
- -------------------------------------------------------------------------------------------------
Three months ended $ 711,000 56.2% $ 646,000 44.3% $ 65,000 10.1%
Nine months ended $ 2,094,000 56.4% $ 2,057,000 45.2% $ 37,000 1.8%
During the three months ended March 31, 2006, cost of sales increased by $65,000
compared to the prior year's three month period and resulted from an 11.9%
increase in cost of sales, as a percentage of net sales, which was partially
offset by lower costs related to the decrease in net sales. The 11.9% increase
in cost of sales, as a percentage of net sales, was due to an 8.7% increase in
product costs, as a percentage of net sales, traceable to sales of:
o Titles sold at substantial price discounts as required by certain
retailers and distributors to secure retail shelf positions;
o Titles containing "value added" components such as multiple CD's,
posters, manuals and novelty items related to game themes; and
o End-of-lifecycle titles to discount retailers and distributors at sales
prices below standard wholesale and distributor prices.
Additionally, we experienced a 3.2% increase in all other cost of sales, as a
percentage of net sales, which related to cost increases, as a percentage of net
sales, of: tooling for new box designs; CD sorting for discount retailers;
anti-piracy software for higher-priced box titles; and freight expense related
to consignment shipments which revenues were deferred until such time that the
product sells through to consumers.
During the nine months ended March 31, 2006, cost of sales increased by $37,000
compared to the prior year's nine month period and resulted from similar factors
that impacted the three-month results.
Product Development
Product development expenses consist of personnel costs related to product
management, content acquisition, quality assurance testing, packaging design and
website administration, along with outside services for product ratings,
language localization, additional quality assurance testing and website
infrastructure maintenance, as well as non-recoverable costs related to titles
that did not achieve distribution into their intended retail channels.
The following table represents our product development expenses for the three
and nine months ended March 31, 2006 and 2005:
March 31, % of March 31, % of Increase %
2006 net sales 2005 net sales (Decrease) Change
- -------------------------------------------------------------------------------------------------
Three months ended $ 165,000 13.0% $ 102,000 7.0% $ 63,000 61.8%
Nine months ended $ 376,000 10.1% $ 445,000 9.8% ($ 69,000) (15.5%)
The $63,000 increase in product development expenses for the three months ended
March 31, 2006 resulted from higher costs associated with developing and
supporting our new higher priced Cinemaware Marquee box titles. These costs were
incurred for quality assurance testing, language localization, website and
animation development, and ESRB product ratings, along with increased salary
related costs traceable to additional employees hired to support these efforts
and travel expenses incurred to search for new product content for upcoming
titles.
The $69,000 decrease in product development expenses for the nine months ended
March 31, 2006 related to the non-recurrence of the prior year's $122,000
write-off of capitalized costs related to the RealAge Games & Skills title,
which was partially offset by cost increases similar to the categories described
in the three month results.
As we continue to implement our strategy of publishing higher quality, and
higher-priced PC game titles, we expect our product development expenses to
increase due to the increased complexity of game play, additional quality
control and language localization required, additional development of game
specific websites, and other procedures required to bring these more technically
sophisticated games to market. In future periods, we may also incur increased
product development costs as we seek to develop our own PC game titles.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of personnel
related costs, insurance costs, stock-based compensation expense, professional
service fees for legal, accounting and public relations, advertising costs, as
well as occupancy costs including rent, utilities and phones, and other
administrative expenses.
The following table represents our selling, general and administrative expenses
for the three and nine months ended March 31, 2006 and 2005:
March 31, % of March 31, % of Increase %
2006 net sales 2005 net sales (Decrease) Change
- -------------------------------------------------------------------------------------------------
Three months ended $ 648,000 51.2% $ 661,000 45.3% ($ 13,000) (2.0%)
Nine months ended $ 1,810,000 48.7% $ 1,880,000 41.3% ($ 70,000) (3.7%)
The $13,000 decrease in selling, general and administrative expenses for the
three months ended March 31, 2006 resulted from $65,000 in lower legal and
litigation expenses related to intellectual property matters experienced in the
year ago quarter, which was partially offset by cost increases in: public
relations of $21,000, advertising of $18,000, capital stock tax of $7,000 and
recruiting fees of $6,000.
The $70,000 decrease in selling, general and administrative expenses for the
nine months ended March 31, 2006 was attributable to the same factors that
impacted the three month results, in addition to a decrease in independent sales
agent commissions due to declining sales at retailers where such commissions are
incurred.
As we continue to publish higher priced titles for the PC, we expect to incur
greater promotional costs, such as print and online banner ads, in-store
circulars, video loops, and public relations, in order to support the retail and
online releases of these higher quality titles competing at higher price points.
Interest Income, net
The following table represents our net interest income for the three and nine
months ended March 31, 2006 and 2005:
March 31, % of March 31, % of Increase %
2006 net sales 2005 net sales (Decrease) Change
- -------------------------------------------------------------------------------------------------
Three months ended $ 11,000 0.9% $ 2,000 0.1% $ 9,000 n/m
Nine months ended $ 32,000 0.9% $ 5,000 0.1% $ 27,000 n/m
Provision for Income Taxes
The following table represents our provision for income taxes for the three and
nine months ended March 31, 2006 and 2005:
March 31, % of March 31, % of Increase %
2006 net sales 2005 net sales (Decrease) Change
- -------------------------------------------------------------------------------------------------
Three months ended $ - 0 - - 0 - % $ 6,000 0.4% ($ 6,000) n/m
Nine months ended $ - 0 - - 0 - % $ 17,000 0.3% ($ 17,000) n/m
Net income (loss)
The following table represents our net income (loss) for the three and nine
months ended March 31, 2006 and 2005:
March 31, % of March 31, % of Increase %
2006 net sales 2005 net sales (Decrease) Change
- ---------------------------------------------------------------------------------------------------- -----------
Three months ended ($ 248,000) (19.6%) $ 46,000 3.2% ($ 294,000) n/m
Nine months ended ($ 535,000) (14.4%) $ 157,000 3.5% ($ 692,000) n/m
Weighted Average Common Shares
For the three months ended March 31, 2006, the weighted average common shares
outstanding on a diluted basis increased to 11,724,193, compared to 11,030,149
for the three months ended March 31, 2005. This 694,044 increase in the diluted
basis calculations of weighted average common shares resulted from the issuance
of the Company's shares of common stock related to the exercise of common stock
options, combined with the weighted average of the common shares issued in
October 2005 to Cinemaware, Inc., partially offset by the common stock
equivalents included in the year ago quarter's calculation due to that period's
net income.
For the nine months ended March 31, 2006, the weighted average common shares
outstanding on a diluted basis increased to 11,416,555, compared to 10,992,332
for the nine months ended March 31, 2005. This 424,223 increase in the diluted
basis calculations of weighted average common shares resulted from similar
factors that affected the three-month calculations.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" which revised SFAS No. 123, "Accounting for Stock-Based
Compensation". This statement supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees". The revised statement addresses the accounting for
share-based payment transactions with employees and other third parties,
eliminates the ability to account for share-based compensation transactions
using APB 25 and requires that the compensation expense relating to such
transactions be recognized in the statement of operations. The revised statement
became effective during the first interim period beginning after June 15, 2005.
The adoption of SFAS No. 123 (revised 2004) did not have a material impact on
our financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in Accounting
Research Bulletin ("ARB") No. 43, "Restatement and Revision of Accounting
Research Bulletins", Chapter 4, "Inventory Pricing", to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) and requires that those items be recognized as
current-period charges. SFAS No. 151 also requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 became effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS
No. 151 did not have a material impact on our financial statements.
Liquidity and Capital Resources
At March 31,
-------------------------
2006 2005 Change
---------------------------------------
Cash and cash equivalents $ 1,483,000 $ 2,275,000 ($ 792,000)
=========== =========== ==========
Percent of total assets 34.8% 51.7%
==== ====
Nine Months Ended
March 31,
-------------------------
2006 2005 Change
----------------------------------------
Cash (used in) provided by
operating activities ($ 924,000) $ 478,000 ($ 1,402,000)
Cash used in investing activities (5,000) (11,000) 6,000
Cash provided by financing activities - 0 - 66,000 (66,000)
----------------------------------------
Net (decrease) increase in cash and
cash equivalents ($ 929,000) $ 533,000 ($ 1,462,000)
=========== =========== ===========
Changes in Cash Flow, Operating Activities
During the nine months ended March 31, 2006, we had $924,000 in cash used in
operating activities compared to $478,000 in cash provided by operating
activities for the nine months ended March 31, 2005. The $924,000 in cash used
in operating activities for the nine months ended March 31, 2006 resulted from
increases in net accounts receivable of $741,000 and inventory of $63,000, along
with the $535,000 net loss realized during this period, which cash uses were
partially offset by cash sources from increases in accounts payable of $318,000
and accrued expenses of $39,000, along with $58,000 in recorded stock
compensation expense.
Accounts Receivable, net
------------------------
At March 31, 2006, net accounts receivable totaled $1,010,000, compared to
$269,000 at June 30, 2005. This $741,000 increase in net accounts receivable
resulted from an $883,000 increase in gross accounts receivable that was
partially offset by a $142,000 increase in the allowance for product returns and
price markdowns. The increase in gross accounts receivable resulted primarily
from a higher level of gross sales invoiced during the three months ended March
31, 2006 compared to the three months ended June 30, 2005, combined with lower
receivable collections during the three months ended March 31, 2006 compared to
the three months ended June 30, 2005. The increase in the allowance for product
returns and price markdowns resulted from lower actual product returns and price
markdowns processed during the nine months ended March 31, 2006 compared to the
provision for product returns and price markdowns recorded during this same
period.
Generally, we have been able to collect net accounts receivable in the ordinary
course of business, but periodically we have experienced slowness in distributor
and retailer receivable collections. Throughout each reporting period, we
communicate with distributors and retailers in order to expedite their payments
of past due amounts or to process receivable credits for authorized product
returns and price markdowns. Since we do not hold any collateral to secure
payment from any of our customers and because most of our customers have the
right to return products and receive price markdowns that can be used to reduce
their receivable payments to us, the realizable value of our net accounts
receivable is continually reviewed in order to help anticipate future liquidity
issues that could result from our inability to collect a net receivable balance
in the normal course of business.
Concentration of Customers
--------------------------
Historically, Atari has represented the majority of our net accounts receivable
and related cash receipts. In December 2005, we began to transition the majority
of our North American mass-merchant retail distribution to Take-Two Interactive
Software ("Take Two"), which has distributed our titles into the office
superstore and discount warehouse retail channels for several years. We
anticipate that Take Two will continue representing a growing percentage of our
net sales and net accounts receivable in future periods, while at the same time
Atari's percentage of our business should continue to decrease. We believe that
our ability to collect, in a timely manner, the net account receivable owed by
Take Two and Atari, will be significant for us to be able to meet our financial
obligations and to fund our operations for the foreseeable future. Over the
upcoming quarters as our distribution through Atari decreases, we will continue
to monitor their payment trends in order to avoid unanticipated collection
issues.
At March 31, 2006, Take Two's net accounts receivable totaled $322,000, or 32%,
of our total net accounts receivable, compared to Atari's net accounts
receivable of $151,000, or 15%, of our total accounts receivable. During the
nine months ended March 31, 2006, we collected $1,040,000 in receivable payments
from Atari and $126,000 in receivable payments from Take Two, which represented
36% and 4%, respectively, of our total accounts receivable collections during
that period.
Inventory, net
--------------
During the nine months ended March 31, 2006, our net inventory value increased
by $63,000, or 7%, and was a result of increased inventory shipments into the
retail channel under consignment sales agreements of units that have not yet
sold through to consumers as of March 31, 2006. Additionally, we are continuing
to convert units of excess and slower moving inventory into cash through product
sales to inventory liquidators and discount retailers. At March 31, 2006, this
second tier of inventory represented approximately 25% of our total net
inventory value, and based on the information currently available to us, we
believe that the current carrying values of this inventory approximate the cash
we anticipate receiving in future periods.
Prepaid and other expenses
--------------------------
During the nine months ended March 31, 2006, our prepaid and other expenses
increased by $25,000, which related to annual payments for corporate insurances
and retail market research, partially offset by a refund of prepaid federal
taxes.
Accounts Payable
----------------
During the nine months ended March 31, 2006, our accounts payable increased by
$318,000, due to increased inventory purchases of higher costing box titles that
contained additional value-added components (posters, manual, multiple CD's, and
novelty items related to game themes) to help support a higher retail value to
consumers.
Accrued Expenses
----------------
During the nine months ended March 31, 2006, our accrued expenses increased by
$39,000, as a result of increases in marketing promotions, royalties and
relocation costs, which were partially offset by a decrease in the amount of
customer accounts receivable credit balances reclassified to current
liabilities.
Changes in Cash Flow, Non-Operating Activities
During the nine months ended March 31, 2006, we had net cash used in investing
activities of $5,000 for equipment purchases for our computer network, compared
to $11,000 in net cash used in investing activities during the year ago period
for similar expenditures.
During the nine months ended March 31, 2006, we had no financing activities
compared to the nine months ended March 31, 2005, when we had $66,000 in cash
provided by financing activities related to cash proceeds received from the
exercise of options to purchase shares of the Company's common stock, that was
partially offset by cash dividend payments to shareholders of the Company's
common stock.
Credit Facility
In December 2005, we renewed our credit facility agreement with Hudson United
Bank ("HUB"), which matures on December 1, 2006. This credit facility was
established to provide working capital for our operations. Amounts outstanding
under this credit facility are charged interest at one-half of one percent above
HUB's current prime rate and such interest is due monthly. Our access to these
funds is limited to the lesser of $750,000 or seventy-five percent of qualified
accounts receivable, which are defined as invoices less than ninety days old and
net of any allowances for product returns, price markdowns and customer bad
debts. As of March 31, 2006, we had not utilized any of this credit facility,
and we had access to the full $750,000 amount under this credit facility, based
on the prescribed calculation of seventy-five percent of qualified accounts
receivable as of that date. The credit facility is secured by all of the
Company's assets and requires us, among other things, to maintain certain
financial covenants that are tested quarterly.
Contractual Obligations and Commitments
We occupy our 5,000 square foot office facility located in Langhorne,
Pennsylvania under an operating lease that is scheduled to expire on September
30, 2010. Additionally, we currently rent certain office equipment through
various operating lease agreements. At March 31, 2006, we had future operating
lease commitments of $238,000, as reflected in the table below.
Under various licensing agreements with third-party software developers, we are
required to pay royalties for the use of licensed content in our products. Most
of these licensing agreements require us to make advance royalty payments to
these software developers prior to the time we recognize any net sales of
software titles containing this licensed content. As we continue to implement
our strategy of publishing higher quality, and higher-priced game titles for the
PC, and seek opportunities to publish titles for other gaming devices, we expect
our advance royalty payments to significantly increase and represent a greater
use of available cash. At March 31, 2006, we had future commitments to pay
$88,000 in advance licensing and royalty payments to third-party licensors and
software developers as reflected in the table below.
As part of a public relations campaign intended to support and promote our
brands and the retail releases of our new higher priced PC game titles, as of
March 31, 2006 we had $22,000 in commitments relating to a professional services
agreement with a public relations firm.
The following table represents a summary of our off-balance sheet contractual
obligations and commitments at March 31, 2006, which we expect to fund by cash
flows from operations.
Payments Due by Period
--------------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
- --------------------------------------------------------------------------------------------
Operating leases $ 238,000 $ 64,000 $ 152,000 $ 22,000 $ - 0 -
Advance royalties 88,000 88,000 - 0 - - 0 - - 0 -
Public relation services 22,000 22,000 - 0 - - 0 - - 0 -
- --------------------------------------------------------------------------------------------
Totals $ 348,000 $ 174,000 $ 152,000 $ 22,000 $ - 0 -
========= ========= ========= ======== =======
Liquidity Risk
Our ability to achieve positive cash flow remains essential to our survival as a
going concern because access to our existing credit facility is limited to the
lesser of $750,000 or 75% of our qualified accounts receivable. As of March 31,
2006 we had access to the full $750,000 amount under this credit facility, based
on the prescribed calculation as of that date. In particular, our ability to
achieve positive cash flow depends upon a variety of factors, including the
timing of the collection of net accounts receivable, the creditworthiness of our
software distributors and retailers, sell-through of our products to consumers,
and the costs of developing, producing, distributing, marketing and promoting
our software titles.
There are significant challenges that we will need to continue to successfully
manage in order to fund our operations in the future. These challenges include,
but are not limited to, maintaining commercially viable relationships with our
distributors and retailers, collecting timely receivable payments from our
concentrated group of distributors and retailers, managing timely retail release
of higher costing games in order to recoup upfront payments within projected
cash-flows and maintaining acceptable payment terms with our trade vendors. For
example, our liquidity would be significantly impacted if Take Two or Atari, for
any reason, did not make receivable payments to us on a timely basis.
Additionally, there are factors beyond our control that could significantly
affect our operating cash flow. The most significant of these factors is the
increased liquidity risk we face from the increased level of advanced royalties,
advertising, development and product costs we plan to spend for our new higher
priced box titles. If one or more of these higher priced titles do not achieve
sufficient retail success, then our ability to recoup these costs would be
greatly reduced and our liquidity could be materially impaired.
Another risk we face is the potential for further reductions or the complete
elimination of the shelf space allocated to $9.99 retail priced PC software
games at major retailers where our products are sold. Additionally, as retailers
continue to increase the proportion of their shelf space displaying
higher-priced gaming titles, we could experience a similar reduction in retail
shelf space for $19.99 and $29.99 mid-range priced PC software games that we
intend to sell, as retailers make more room for console titles and PC game
titles priced at $39.99 and higher, and respond to increased sales of mid-range
priced PC games via the Internet. If either of these situations were to occur,
then our cash flow and future financial prospects could be significantly
impacted. Also, if any of our software titles do not sell through to consumers
at a rate acceptable to retailers, we could then be exposed to unanticipated
product return and price markdown credit requests that could then be used by
distributors and retailers to reduce their future receivable payments to us.
This could also cause a reduction in retailer and distributor replenishment
orders for our products. If we experienced a negative trend in any of these
factors, we may not be able to achieve positive cash flow.
Also, as we implement our strategy of publishing higher quality, and
higher-priced game titles for the PC, we may need to seek additional funds to
provide financing for:
- - increased advanced royalty payments or substantial content acquisition
costs needed to obtain higher quality software games;
- - greater product development costs to either internally develop titles
utilizing the Company owned intellectual properties or to complete
additional quality assurance tests on third party titles acquired for
retail release; and
- - larger marketing expenditures to more aggressively promote the retail and
online releases of higher priced titles.
Additional outside financing to support our operations may not be available if
and when we need it. Even if such financing was available from a bank or other
financing source, such financing may cause significant stockholder dilution or
may have other significant costs associated with such financing.
Listing of Our Common Stock
Our common stock trades on the OTC Bulletin Board under the symbol EGAM. We have
considered applying for listing on an exchange, such as the American Stock
Exchange, but at this time we do not meet the standards for listing.
Item 3. Controls and Procedures
(a) Disclosure Controls and Procedures. Under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, we
carried out an evaluation of the effectiveness of our disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of March 31, 2006 (the "Evaluation Date").
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that as of the Evaluation Date, our disclosure controls
and procedures were effective to provide reasonable assurance that the
information required to be disclosed in our reports filed or furnished under the
Exchange Act are recorded, processed, summarized and reported, within the
periods specified in the SEC's rules and forms. We believe that a controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
(b) Changes in Internal Control over Financial Reporting. There have not been
any changes in our internal control over financial reporting during the quarter
ended March 31, 2006 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Part II. Other Information
Item 6. Exhibit Listing
The following exhibits are being filed or furnished as part of this Quarterly
Report on Form 10-QSB:
Exhibit Number Description of Exhibit
- -------------- ----------------------
10.1+ Distribution Agreement dated November 15, 2005 between
Gathering of Developers, Inc., a division of Take-Two
Interactive Software Inc., and eGames, Inc.
31.1 Certification of Gerald W. Klein as President and Chief
Executive Officer of eGames, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Thomas W. Murphy as Vice President and Chief
Financial Officer of eGames, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Gerald W. Klein as President and Chief
Executive Officer of eGames, Inc. pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Thomas W. Murphy as Vice President and Chief
Financial Officer of eGames, Inc. pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
+ Indicates confidential treatment requested as to certain portions,
which portions were omitted and filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment Request.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eGames, Inc.
(Registrant)
Date: May 15, 2006 /s/ Gerald W. Klein
------------ ---------------------------------
Gerald W. Klein, President, Chief
Executive Officer and Director
Date: May 15, 2006 /s/ Thomas W. Murphy
------------ ------------------------------------
Thomas W. Murphy, Chief Financial
Officer and Chief Accounting Officer
Exhibit 31.1
Certification
-------------
I, Gerald W. Klein, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of eGames, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 15, 2006
------------
/s/ Gerald W. Klein
-------------------------------------
Gerald W. Klein
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification
-------------
I, Thomas W. Murphy, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of eGames, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 15, 2006
------------
/s/ Thomas W. Murphy
----------------------------
Thomas W. Murphy
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of eGames, Inc. (the "Company") on Form
10-QSB for the quarter ended March 31, 2006 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Gerald W. Klein,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, based on my knowledge, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Gerald W. Klein
- -------------------------------------
Gerald W. Klein
President and Chief Executive Officer
Date: May 15, 2006
------------
The foregoing certification is being furnished to the Securities and Exchange
Commission pursuant to 18 U.S.C. Section 1350 as an exhibit to the Report and is
not being filed as part of the Report or as a separate disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of eGames, Inc. (the "Company") on Form
10-QSB for the quarter ended March 31, 2006 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Thomas W. Murphy, Vice
President and Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, based on my knowledge, that:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Thomas W. Murphy
- -----------------------
Thomas W. Murphy
Chief Financial Officer
Date: May 15, 2006
------------
The foregoing certification is being furnished to the Securities and Exchange
Commission pursuant to 18 U.S.C. Section 1350 as an exhibit to the Report and is
not being filed as part of the Report or as a separate disclosure document.