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 JUNE 30, 2004
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- --------------------
Commission File Number: 0-30096
-----------------
EAPI ENTERTAINMENT, INC.
------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 77-0454933
------ -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 204 - 3970 E. HASTINGS STREET
BURNABY, BC V5C 6C1
-------------------
(Address of principal executive offices)
(604) 419 0430
--------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date: As of July 16, 2004, 13,588,893
shares of common stock, par value $0.001 were issued and outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
-1-
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .3
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . .3
Condensed Consolidated Balance Sheets as of June 30,
2004 (unaudited), and September 30, 2003 . . . . . . . . . . . .4
Condensed Consolidated Statement of Operations and
Comprehensive Loss for the Nine months ended June 30,
2004 and June 30, 2003 (unaudited) . . . . . . . . . . . . . . .5
Condensed Consolidated Statement of Operations and
Comprehensive Loss for the Three months ended June
30, 2004 and June 30, 2003 (unaudited) . . . . . . . . . . . . .6
Condensed Consolidated Statement of Shareholders
Deficiency for theNine months ended June 30, 2004 and
2003 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . .7
Condensed Consolidated Statements of Cash Flows for
the Nine months ended June 30, 2004 and 2003 (unaudited) . . . .8
Notes to the Condensed Consolidated Financial Statements
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . 18
Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . . 25
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 27
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . 27
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . 28
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 28
Item 5. Other information . . . . . . . . . . . . . . . . . . . . . . . 28
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
-2-
ITEM 1. FINANCIAL STATEMENTS.
-3-
EAPI ENTERTAINMENT, INC.
(FORMERLY DURO ENQYME PRODUCTS, INCORPORATED)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS June 30, September 30,
------------ ---------------
2004 2003
------------ ---------------
(unaudited)
------------
Current assets
Cash in bank $ 915 $ 38,995
Non-trade receivable 79,083 185,443
Prepaid expenses 1,899 44,988
------------ ---------------
Total current assets 81,897 269,426
------------ ---------------
TOTAL ASSETS $ 81,897 $ 269,426
============ ===============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and fees $ 449,414 $ 454,231
Payables and fees to related parties 2,198,535 2,104,779
Short term notes to related parties 1,001,036 1,313,302
------------ ---------------
Total current liabilities 3,648,985 3,872,312
Deferred Rent - 18,055
------------ ---------------
TOTAL LIABILITIES 3,648,985 3,890,367
------------ ---------------
Shareholders' Deficiency
Preferred stock, 40,000,000 shares authorized $.001
par value, 0 shares outstanding - -
Common stock, 500,000,000 authorized, $.001 par
value, 13,588,893 and 13,155,560 outstanding, respectively 13,589 13,156
Paid in capital 5,478,875 5,293,014
Common stock to be issued 697,313 -
Deficit (9,282,754) (8,502,410)
Accumulated other comprehensive loss (474,111) (424,701)
------------ ---------------
Total shareholders' deficiency (3,567,088) (3,620,941)
------------ ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 81,897 $ 269,426
============ ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements
-4-
EAPI ENTERTAINMENT, INC.
(FORMERLY DURO ENZYME PRODUCTS, INCORPORATED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
OTHER COMPREHENSIVE LOSS (unaudited)
For the Nine months ended
June 30, June 30,
------------ ------------
2004 2003
------------ ------------
Revenue $ - $ -
------------ ------------
Expenses
Consulting and professional fees 539,741 508,671
Office and administration 32,921 42,283
Investor communication 3,284 3,476
Travel, meals and entertainment 186 759
Rent, utilities and telephone 90,556 89,779
------------ ------------
Total expenses 666,688 644,968
------------ ------------
Loss from operations (666,688) (644,968)
------------ ------------
Other expense
Interest (113,656) (33,104)
------------ ------------
Total other expenses (113,656) (33,104)
------------ ------------
Loss from continuing operations (780,344) (678,072)
Loss from discontinued operations - (339,473)
------------ ------------
Net loss $ (780,344) $(1,017,545)
============ ============
Loss per share of common stock
From continuing operations $ (0.06) $ (0.05)
From discontinued operations - (0.03)
------------ ------------
Net loss per share of common stock $ (0.06) $ (0.08)
============ ============
Weighted average of
shares outstanding 13,179,370 13,155,560
============ ============
Comprehensive Income (Loss)
Foreign currency translation adjustment $ (49,410) $ (444,835)
------------ ------------
Other comprehensive income (loss) (49,410) (444,835)
Net loss (780,344) (1,017,545)
------------ ------------
Comprehensive Loss $ (829,754) $(1,462,380)
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements
-5-
EAPI ENTERTAINMENT, INC.
(FORMERLY DURO ENZYME PRODUCTS, INCORPORATED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
OTHER COMPREHENSIVE LOSS (unaudited)
For the Three months ended
June 30, June 30,
------------ ------------
2004 2003
------------ ------------
Revenue $ - $ -
------------ ------------
Expenses
Consulting and professional fees 177,070 285,739
Office and administration 17,223 21,119
Investor communication 2,626 3,476
Travel, meals and entertainment - 759
Rent, utilities and telephone 18,250 36,202
------------ ------------
Total expenses 215,169 347,295
------------ ------------
Loss from operations (215,169) (347,295)
------------ ------------
Other expense
Interest (33,922) (514)
------------ ------------
Total other expenses (33,922) (514)
------------ ------------
Loss from continuing operations (249,091) (347,809)
Loss from discontinued operations - (350)
------------ ------------
Net loss $ (249,091) $ (348,159)
============ ============
Loss per share of common stock
From continuing operations $ (0.02) $ (0.03)
From discontinued operations - (0.00)
------------ ------------
Net loss per share of common stock $ (0.02) $ (0.03)
============ ============
Weighted average of
shares outstanding 13,226,989 13,155,560
============ ============
Comprehensive Income (Loss)
Foreign currency translation adjustment $ 70,928 $ (258,929)
------------ ------------
Other comprehensive income (loss) 70,928 (258,929)
Net loss (249,091) (348,159)
------------ ------------
Comprehensive Loss $ (178,163) $ (607,088)
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements
-6-
EAPI ENTERTAINMENT, INC.
(FORMERLY DURO ENZYME PRODUCTS, INCORPORATED)
CONDENSED CONSOLIDATED STATEMENTS SHAREHOLDERS' DEFICIENCY (Unaudited)
For the Nine months ended
June 30, 2003
-------------
Common stock Other
--------------------- Paid in Common stock Comprehensive
Shares Amount Capital to be issued Deficit Income (Loss)
----------- -------- ---------- -------------- ------------ ---------------
Balance
September 30, 2002 14,355,560 $14,356 $4,362,070 $ - $(7,089,548) $ -
Disposal of Business (1,200,000) (1,200) 1,200
Foreign Currency Translation Adjustment (444,835)
Net loss for the period
ended June 30, 2003 (1,017,545)
----------- -------- ---------- -------------- ------------ ---------------
13,155,560 $13,156 $4,363,270 $ - $(8,107,093) $ (444,835)
=========== ======== ========== ============== ============ ===============
June 30, 2003
-------------
Balance
September 30, 2003 13,155,560 $13,156 $5,293,014 $ - $(8,502,410) $ (424,701)
Foreign Currency Translation Adjustment (49,410)
Stock subscriptions issued in
Exchange for short-term debt 883,607
Stock issued on subscriptions 433,333 433 185,861 (186,294)
Net loss for the period
ended June 30, 2004 (780,344)
----------- -------- ---------- -------------- ------------ ---------------
13,588,893 $13,589 $5,478,875 $ 697,313 $(9,282,754) $ (474,111)
=========== ======== ========== ============== ============ ===============
June 30, 2003
-------------
Total
------------
Balance
September 30, 2002 $(2,713,122)
Disposal of Business -
Foreign Currency Translation Adjustment (444,835)
Net loss for the period
ended June 30, 2003 (1,017,545)
------------
$(4,175,502)
============
June 30, 2003
-------------
Balance
September 30, 2003 $(3,620,941)
Foreign Currency Translation Adjustment (49,410)
Stock subscriptions issued in
Exchange for short-term debt 883,607
Stock issued on subscriptions -
Net loss for the period
ended June 30, 2004 (780,344)
------------
$(3,567,088)
============
The accompanying notes are an integral part of the condensed consolidated
financial statements
-7-
EAPI ENTERTAINMENT, INC.
(FORMERLY DURO ENZYME PRODUCTS, INCORPORATED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the Nine months ended
June 30, June 30,
---------- ------------
2004 2003
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(780,344) $(1,017,545)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization - 62,500
Deferred rent (18,055) 15,450
Increase (decrease) in accounts payable (4,817) 366,120
Decrease (increase) in non-trade receivable 106,360 (80,848)
Decrease (increase) in Prepaid Expenses 43,089 (6,160)
Increase in Assets to be Disposed - (12,777)
---------- ------------
NET CASH USED IN OPERATING
ACTIVITIES (653,767) (673,260)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long term debt - 31,506
Proceeds of short term notes from related parties 695,468 830,645
Repayments of short term notes from related parties (124,127) (188,695)
Increase in payables to related parties 93,756 445,387
---------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 665,097 1,118,843
---------- ------------
Effect of Foreign Currency Translation (49,410) (444,835)
---------- ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (38,080) 748
Cash and cash equivalents at the beginning of the period 38,995 (1,262)
---------- ------------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 915 $ (514)
========== ============
SUPPLEMENTAL DISCLOSURES
Noncash Investing and Financing Activities
Stock subscriptions issued in exchange for
Short term notes from related parties $ 883,607 $ -
========== ============
The accompanying notes are an integral part of the condensed consolidated
financial statements
-8-
EAPI ENTERTAINMENT, INC.
(Formerly - Duro Enzyme Products, Inc.)
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
For the Nine Months Ended June 30, 2004
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
---------------------------------------------------------
Nature of Business
- --------------------
EAPI Entertainment, Inc. (the "Company") was incorporated under the laws of
the State of Nevada on September 15, 1995. The Company's current business
activities, which began in the second quarter of 2003, include developing
business for electronic entertainment, education, and the marketing of
natural agricultural, food, and gardening products. The Company is seeking
to acquire revenue generating businesses or projects with long term
potential that will enable the Company to generate revenues to fund the
current business plan in electronic entertainment, education, and the
marketing of natural agricultural, food, and gardening products.
Name Change
- ------------
On May 9, 2003, the Company filed to have its name changed to EAPI
Entertainment, Inc. and on May 27, 2003, the name change was approved and
effective.
Basis of Presentation
- -----------------------
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules and
regulations of the Securities and Exchange Commission for interim financial
information. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position
and results of operations.
It is management's opinion, however, that all adjustments (consisting of
normal recurring adjustments) have been made which are necessary for a fair
financial statement presentation. The results for the interim period are
not necessarily indicative of the results to be expected for the year.
These unaudited interim condensed financial statements should be read in
conjunction with the Company's audited consolidated financial statements as
of September 30, 2003 included in the Company's Annual Report on Form
10-KSB.
Use of Estimates
- ------------------
The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America. These
principles require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
-9-
Fair Value of Financial Instruments
- ---------------------------------------
The carrying amount of the Company's financial instruments, including,
cash, cash overdraft, accounts receivable and payable, and notes and loans
payable approximate fair value due to the relative short period to maturity
for these instruments.
Per Share Data
- ----------------
Earnings (loss) per common share for the nine and three months ended June
30, 2004 and 2003 is computed based on the weighted average common stock
and diluted common stock equivalents outstanding during the period as
defined by Statement of Financial Accounting Standards, No. 128, "Earnings
Per Share". For the nine and three months ended June 30, 2004 and 2003,
common stock equivalents are not considered in the calculation of diluted
loss per share, as the effect would have been anti-dilutive.
Cash Equivalents
- -----------------
For the purpose of the statement of cash flows, the company considers all
highly liquid debt instruments purchased with the original maturity of
three months or less to be cash equivalents.
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of EAPI
Entertainment, Inc., and its Four wholly owned subsidiaries one of which
owns five subsidiaries:
EAPI Center Inc.
Home.web Sub.Inv
Duro Enzyme Solutions, Inc. - Nevada, USA (Name to be changed)
Electronic Alliance Systems Inc. (To be changed from Duro Enzyme Solutions,
Inc.)
EASI Studios Inc.
SuperNet Computing Inc.
EASI Games Inc.
EASI Education Inc.
EASI Movies, Music Television and Video Inc.
All material inter-company transactions have been eliminated.
Property and Equipment
- ------------------------
Property and equipment are recorded at cost. Maintenance and repairs are
expensed as incurred; major renewals and betterments are capitalized. When
items of property or equipment are sold or retired, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss
is included in income. Depreciation is provided using the straight line and
accelerated methods over the useful lives.
Intangible and Other Assets
- ------------------------------
The cost of purchase of other assets was recorded at the purchase price of
the contract and amortized over its useful life not to exceed 10 years
using the straight-line method. There is no
-10-
amortization cost for the nine-month period ended June 30, 2004 due to the
license termination. For the nine-month period June 30, 2003, amortization
was $62,500 and was included in discontinued operations (See Note 10).
Income Taxes
- -------------
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the recorded book basis and
tax basis of assets and liabilities for financial and income tax reporting.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settle.
Deferred taxes are also recognized for operating losses that are available
to offset future taxable income and tax credits that are available to
offset future federal income taxes.
Comprehensive Income
- ---------------------
Generally accepted accounting principles require the inclusion of the
Statement of Comprehensive Income (Loss) for certain transactions including
gain or loss on foreign currency transactions and unrealized gain or loss
on marketable securities
Material Adjustments
- ---------------------
Management is not aware of any material adjustment that needs to be made to
the financial statements.
Foreign Currency
- -----------------
The functional currency of the Company is US$. A significant subsidiary
conducts its business in a foreign currency (CDN$) and appropriate exchange
translation adjustments are made during the period and at the period end to
report the results in US$.
Reclassification
- ----------------
Certain account reclassifications have been made to the financial
statements of the prior year in order to conform to classifications used in
the current year. These changes had no impact on previously stated
financial statements of the Company.
NOTE 2: DISCONTINUED OPERATIONS
------------------------
On December 23, 2002, the Board of Directors agreed to dispose of Bruden
and on January 6, 2003, an agreement was signed with the former owner to
dispose of the business. The results of Bruden Steaming and Vac Truck
Services Ltd. during the period ended June 30, 2003 are included as
discontinued operations in the financial statements (See Note 10).
NOTE 3: RELATED PARTY TRANSACTION
-------------------------
A total of $477,357 and $470,348 were accrued in consultant services to
related parties for the nine months ending June 30, 2004 and 2003,
respectively. The total outstanding and unpaid is
-11-
$901,032 at June 30, 2004 and was $602,813 at June 30, 2003. Thirteen (13)
companies, which are owned or controlled by shareholders or creditors of
the Company, have provided services and expertise to the Company during
this period.
No Research and Development services were performed in the period ended
June 30, 2004. During the period to June 30, 2003, the Company endorsed
Research and Development Service Agreements with a company owned by a
creditor of the Company. The Agreement was canceled in December 2002. This
agreement retained the Founder's company's expertise and services for
research, development, design, and related consultations. A consulting fee
was charged at a standard rate, established by the consultants. An
additional 15% was charged on incurred costs as an administrative, overhead
and handling charge. The long-term debt owed has been canceled but was also
owed to the creditor, however the amount is $NIL. At June 30, 2003, the
amount owed was $Nil (See Notes 8 and 10).
Short-term loans of $695,468 were advanced to the Company by five
shareholders during the period ending June 30, 2004. The interest rate for
the loans is 10%. $830,645 was advanced during the period ended June 30,
2003. The funds were used for operating capital and repayment of short-term
loans of $124,127 to June 30, 2004 and $188,695 to June 30, 2003.
On June 14, June 15, June 22, June 23 and June 25, 2004 the board of
directors approved a total of $883,607 in short-term loans that were
converted to stock subscription agreements to a company owned by a creditor
of the Company. On June 15, 2004 a total of 433,333 common shares were
issued by the Company from $186,294 of the subscription agreements. Total
common shares of the Company that are required to be issued under the
subscription agreements are 2,297,785 (See Note 6).
The Company had two 5-year leases for facilities. Both were terminated by
mutual agreement in December 2002 (See Note 9). One lease was for office
space and furnishings. This lease has accrued rent at the end of June 30,
2004 of $223,653 and no amounts have been paid to date. The other lease was
for research space. It has accrued rent at the end of June 30, 2004 of
$204,494 and no amounts have been paid to date. Both leases were held by
shareholders of the Company, which own the premises.
The Company has accrued fees of $742,664 for a 36-month Technology,
Operations, Maintenance, Research & Development, Engineering and Training
consulting contract with a company owned by shareholders. The contract was
entered into on January 1, 2002. On December 13, 2002, the contract was
cancelled and both parties agreed to repay the outstanding fees from
revenue generated by the Company.
The Company has accrued fees of $126,692 for a 4-month Office, Accounting &
Administration contract with a company owned by shareholders that own less
than 5% of EAPI authorized and issued shares. The Company entered into the
contract for the period of time necessary to prepare its in-house office,
accounting, and administrative department. The duration of the contact was
from January 1, 2002 to April 30, 2002. On December 23, 2002, both parties
agreed to repay the outstanding fees from revenue generated by the Company.
The Company has obtained a new location and a new five-year lease beginning
on July 1, 2004. The lease is with a Company owned by the President (See
Note 9).
-12-
NOTE 4: INCOME TAXES
-------------
The long term deferred tax benefit for income taxes from the loss of
operations for the current period consisted of the following components:
long term deferred tax benefit of $185,000 for June 30, 2004 resulting from
a net loss before income taxes, and deferred tax expenses of $185,000
resulting from a valuation allowance recorded against the deferred tax
asset resulting from net operating losses. Net operating loss carryforwards
will expire in 2023.
The valuation allowance will be evaluated at the end of each year,
considering positive and negative evidence about whether the asset will be
realized. At the time, the allowance will either be increased or reduced;
reduction would result in the complete elimination of the allowance if
positive evidence indicates that the valuation allowance of the deferred
tax asset is no longer required.
No provision is being made for state income tax for the nine months ended
June 30, 2004 since all operations are in Canada. In prior years, the
operations were in California and California Franchise taxes were
applicable.
NOTE 5: FIXED ASSETS
-------------
The Company's only fixed assets were part of the Company Bruden Steaming
and Vac Truck Services Ltd. and as a result of the disposition on January
6, 2003, as discussed in Note 2, the assets have been transferred back to
Bruden and the Company has no further fixed assets, only leased and rented
equipment.
NOTE 6: COMMON STOCK
-------------
On January 31, 2002, the Board of Directors voted a 20 to 1 forward stock
split as of the record date of March 4, 2002.
On April 18, 2002, the board approved the issuance of 5,000 shares to James
C. Florio, for his ongoing assistance to the Board of Directors. On May 29,
2002, the Company acquired a new business, Bruden Steaming and Vac Truck
Services Ltd. "(Bruden"). In exchange for all the outstanding shares of
Bruden, the Company issued 1,200,000 common shares.
On December 23, 2002, the Board of Directors agreed to dispose of Bruden.
On January 6, 2003, in exchange for the return of the 1,200,000 common
shares of the Company, the Company disposed of Bruden to the former owner.
On May 9, 2003, the Company filed to have a share rollback of 50 to 1 and
an amendment to the articles of incorporation to decrease the authorized
share capital to 500,000,000 common shares. This 50 to 1 rollback was
approved and on May 27, 2003 it was effective.
All share and per share amounts have been restated to give effect to the
forward and reverse stock splits that took place in 2003 and 2002
respectively.
On June 14, June 15, June 22, June 23 and June 25, 2004 a total of $883,607
in short-term loans were converted to stock subscription agreements issued
to a company owned by a creditor of the Company. On June 15, 2004 a total
of 433,333 common shares were issued by the Company,
-13-
having a fair value of $186,294, from the total subscription agreements.
Total common shares of the Company that are required to be issued under the
subscription agreements are 2,297,785.
The stock subscription agreements entered into had attached warrants for
exercise. The fair value of the warrants at the time of issuance was
immaterial based upon the Company's calculations using the Black Scholes
model. The following warrants remain unexercised at June 30, 2004 are
available to be exercised until June 2005.
Exercise Price Amount of common shares
-------------- -----------------------
CDN $0.35 470,000
CDN $0.65 55,000
CDN $0.75 244,000
CDN $1.00 199,332
US $0.35 915,500
US $0.50 1,021,786
US $0.70 17,000
---------
Total 2,922,618
=========
NOTE 7: EARNINGS PER SHARE
--------------------
Basic earnings (loss) per share are computed by dividing earnings available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect per share
amounts that would have resulted if dilutive potential common stock had
been converted to common stock. The following reconciles amounts reported
in the financial statements.
For the Nine Months Ended 2003
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -----------
Income (loss) from continuing operations
before discontinued operations
available to common stockholders
earnings (loss) per share $ (678,072) 13,155,560 $ (0.05)
============ ============= ===========
Income (loss) from discontinued operations
available to common stockholders
earnings (loss) per share $ (339,473) 13,155,560 $ (0.03)
============ ============= ===========
Income (loss) from continuing operations
and discontinued operations available to
common stockholders
basic (loss) earnings per share $(1,017,545) 13,155,560 $ (0.08)
============ ============= ===========
-14-
For the Nine Months Ended 2004
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- -----------
Income (loss) from continuing operations
available to common stockholders
basic (loss) earnings per share $ (780,344) 13,179,370 $ (0.06)
============ ============= ===========
NOTE 8: NOTES PAYABLE
--------------
Short-term borrowings were from related parties and are discussed in Note
3.
NOTE 9: LEASES
------
The Company had two five-year leases, one for office space and furnishings
and the other for research facilities. Both were terminated in December
2002 by mutual agreement.
The main office building was taken over by a new owner and all research
activities ceased in December 2002. A total of $68,812 was charged to rent
expense under these leases during the period ended June 30, 2003. These
leases were recorded as operating leases and the amounts paid were charged
to expenses. The Company had negotiated a new lease with the new owner for
a three-year term for the main office space. The rental expense charged in
the period to June 30, 2004 and 2003 on the new lease was $60,484 and
$40,941, respectively.
In July 2003, the Company leased an additional office at a monthly rent of
$668. Total rent for the nine-month period ended June 30, 2004 is $5,947.
The lease is a one-year term, and renewal has not yet been determined.
On April 2, 2004, the Company agreed with the landlord to terminate the
lease at May 30, 2004. The Company has obtained a new location and a new
five-year lease beginning on July 1, 2004. The lease is with a Company
owned by the President (See Note 3).
Future minimum annual lease payments are due as follows:
Year Amount
---- --------
2005 $ 24,954
2006 20,678
2007 20,678
2008 22,557
2009 22,557
--------
Total $111,424
========
-15-
NOTE 10: ACQUISITION AND DISPOSITIONS
------------------------------
On May 29, 2002, the Company acquired all of the outstanding shares of a
private company, Bruden Steaming and Vac Truck Services Ltd. ("Bruden") in
exchange for 1,200,000 common shares. The value of the 1,200,000 common
shares issued by the Company to acquire Bruden was determined based on the
average market price of EAPI's common shares over a 2-day period before and
after the date of the acquisition. On January 6, 2003, all the outstanding
shares of Bruden were disposed of in exchange for the return of 1,200,000
common shares of the Company. The results of Bruden's operations in the
period have been included in the condensed consolidated financial
statements as discontinued operations. On September 27, 2002, the Board of
Directors of the Company agreed to review the purchase and the financial
statements of Bruden. On December 23, 2002, Management agreed to dispose of
Bruden and on January 6, 2003, an agreement was signed (See Note 2).
The gain from discontinued operations in Bruden at June 30, 2003 totalled
$12,777.
On May 5, 2003, the Company agreed to terminate a License agreement it had
acquired in September 2000. In December 2002, all research ceased and the
Company was assessing if it should continue with the technology licensed.
The Company concluded that they no longer wished to pursue this technology
and entered into negotiation to terminate the License. This was concluded
with an agreement on May 5, 2003.
The loss from discontinued operations as a result of the License
termination at June 30, 2003 totalled $352,250.
NOTE 11: GOING CONCERN
--------------
The Company's condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As of
June 30, 2004, the Company had a net loss of $780,344, a negative cash flow
from operations of $653,767, a working capital deficiency of $3,567,088 and
a stockholders deficiency of $3,567,088, which raises substantial doubt
about its ability to continue as a going concern.
The Company plans to acquire new business and raise funds, through debt
issuance or through the generation of revenue and achieving profitable
operations. It will also continue to pursue acquisitions and joint
ventures, to strengthen both its balance sheet and cash-flow.
The Company has been actively pursuing new acquisitions and the Company is
currently negotiating with several potential businesses that would
significantly change the operations of the Company. The Company's ability
to continue as a going concern is dependent upon raising capital through
debt or equity financing and ultimately by generating revenue and achieving
profitable operations. There is no assurance that the Company will be
successful in its efforts to raise additional proceeds or achieve
profitable operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
-16-
NOTE 12: SIGNIFICANT EVENTS
-------------------
On May 5, 2003, the Company agreed to terminate its License agreement (See
Note 2 and 10). The Company concluded that they no longer wanted to pursue
this technology and entered into negotiation to terminate the License. This
was concluded with an agreement on May 5, 2003.
On May 9, 2003, the Company filed to have its name changed to "EAPI
Entertainment, Inc." and have the shareholders approve the name change, a
share rollback of 50 to 1 and an amendment to the articles of incorporation
to decrease the authorized share capital to 500,000,000 common shares. On
May 27, 2003, these changes were all effective. This action was taken by
the Board of Directors to more accurately reflect the Company's current
business activities of developing businesses for the electronic
entertainment market. Our Board of Directors believes that the new name
will promote public recognition of the Company and more accurately reflect
the Company's products and business focus.
On October 29, 2003, the President of the Company, Perry Smith, resigned.
The new President of the Company is Peter Gardner. Peter Gardner has over
20 years of experience in the Electronic Entertainment Industry.
On January 31, 2004, a settlement agreement was reached in a lawsuit that
the Company was a party to. The settlement was closed and the Company has
been released from all liability in this matter. On June 24, 2004, under a
consent and dismissal order from the Supreme Court of British Columbia, all
actions were dismissed against the Company and its officers and directors.
The Company had not expected any liability and therefore had not made any
accrual.
As a result of these events, the operations of the Company have
significantly changed.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATIONS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-QSB constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934 (the "Exchange Act"). These statements, identified by words such as
"plan", "anticipate," "believe," "estimate," "should," "expect" and similar
expressions, include our expectations and objectives regarding our future
financial position, operating results and business strategy. These statements
reflect the current views of management with respect to future events and are
subject to risks, uncertainties and other factors that may cause our actual
results, performance or achievements, or industry results, to be materially
different from those described in the forward-looking statements. Such risks and
uncertainties include those set forth under the caption "Management's Discussion
and Analysis or Plan of Operations" and elsewhere in this Form 10-QSB. We do not
intend to update the forward-looking information to reflect actual results or
changes in the factors affecting such forward-looking information. We advise you
to carefully review the reports and documents we file from time to time with the
Securities and Exchange Commission ("SEC"), particularly our Annual Report on
Form 10-KSB and our current reports on Form 8-K.
As used in this Quarterly Report, the terms "we", "us", "our", "Company" and
"EAPI" mean EAPI Entertainment, Inc. unless otherwise indicated. All dollar
amounts in this quarterly report are in U.S. dollars unless otherwise stated.
OVERVIEW
The Company was incorporated on September 15, 1995 under the laws of the State
of Nevada. On May 23, 2003, the Company changed its name from Duro Enzyme
Products Inc. to EAPI Entertainment, Inc.
The Company has undertaken a reorganization of its corporate affairs in
connection with a determination by the Board of Directors to pursue business
opportunities in the areas of electronic entertainment and education and the
marketing of natural agricultural, food and gardening products. The Company has
plans to develop computer video games, on-line educational programs and a
software development studio to be called the EASI Studios. The Company is also
exploring opportunities for the development of an on-line information resource
and distribution center for natural agricultural, food and gardening products.
To date, the Company has not completed the development of any of its planned
products and has not generated any revenues. The Company remains in the initial
stages of developing its products. The ability of the Company to pursue its
business plan and generate revenues is subject to the ability of the Company to
achieve additional financing, of which there is no assurance.
-18-
Video Game Development
- ------------------------
Currently, the Company's endeavors to develop video game products are focused on
obtaining rights to and developing two computer software game engines known as
Adam and Genesis. These software engines are currently owned by the Company's
President, Mr. Peter Gardner. The Company's plan is to acquire access to Adam
and Genesis in order to allow it to develop and design video games based on
those engines.
Adam is a software engine that would allow the development of stand-alone
computer video games. Genesis is a software engine intended to support on-line
video games that can be played by many consumers at a single time. These
on-line video games would be purchased like any other video game, but, in
addition to the purchase price, the consumer would pay a monthly subscription
fee to play the game on-line against other consumers. Both Adam and Genesis are
in the development stage and there is no assurance that development of either of
these engines will reach completion.
The Company is currently in discussions with Mr. Gardner to acquire rights to
use and develop the Adam and Genesis software engines. To date, the Company has
not entered into any agreements with Mr. Gardner with respect to either Adam or
Genesis and there is no assurance that the Company will be able to acquire
rights to either of these software engines.
The Company is also seeking to identify and acquire partially developed video
game projects that it believes have commercial potential. If such a partially
developed video game project is identified by the Company, the Company plans to
fund completion of the development and marketing of that project. The Company
has not yet identified any such video game projects and there is no assurance
that the Company will be able to identify or acquire rights to suitable video
game projects. In the event that it does identify such a project, acquiring
rights to and funding of the development of that project will depend upon the
Company obtaining sufficient financing. The Company has no such financing
arrangements in place and there is no assurance that the Company will be able to
obtain sufficient financing.
On-Line Education
- ------------------
The Company plans to develop computer software that it refers to as the
"EASI-Learning" software to deliver on-line education programs. The Company
plans to develop the EASI-Learning software with software engines specifically
designed to generate customized on-line educational software for the client.
The Company plans to employ a software development and graphic art staff to
create and utilize software engines to produce the Company's final product. In
the event that we are successful in developing the EASI-Learning software, the
Company's business strategy will be to have clients supply the education content
and to incorporate this content into the Company's proprietary software in order
to deliver a software product tailored to each client's needs and requirements
The Company currently is in talks with two potential clients for the
EASI-Learning software, the Alberta Construction Safety Association (the "ACSA")
and Rural Roots, an Alberta based agricultural education group. No agreements
have been reached with either the ACSA or Rural Roots for the development and
delivery of on-line education programs and there is no assurance that the
Company will be able to enter into such agreements with either of these
organizations. If the Company is successful in reaching an agreement with the
ACSA or Rural Roots, the Company will require additional financing to complete
development and delivery of the on-line education programs. No such financing
arrangements are in place and there is no assurance that sufficient financing
can be obtained.
-19-
EASI Studios
- -------------
If the Company is successful in its initial endeavors into the development of
video game and on-line education programs, of which there is no assurance, the
Company plans to develop a software development studio to be known as the EASI
Studios. It is planned that the EASI Studios will house the Company's
development teams, their equipment and the Company's infrastructure. It is
planned that the EASI Studios would contain computer development hardware,
software, audio equipment, management facilities and support staff.
On-Line Natural Agricultural, Food and Gardening Resource and Distribution
- --------------------------------------------------------------------------------
Center
- ------
The Company is exploring opportunities to market natural agricultural, food, and
gardening products through the development of a web-based information resource
and distribution center. It is intended that this on-line resource center will
provide information to consumers and retailers on:
- organically produced and naturally harvested agriculture and food
products;
- the effects of chemical fertilizers and pesticides used in lawns,
gardens, golf courses and parks; and
- the side effects of different food and agricultural additives.
In connection with this on-line resource center, the Company intends to develop
an on-line retail and wholesale distribution network specializing in natural
agricultural, food, and gardening products.
PLAN OF OPERATIONS
The Company's plan of operations for the next twelve months is summarized as
follows:
1. The Company plans to negotiate for the acquisition of the Adam and Genesis
software engines and to develop video game products incorporating these
computer engines. The Company estimates that it will expend approximately
$300,000 to acquire and develop these projects over the next twelve months.
2. The Company plans to continue its development of a web-based information
resource and distribution center for natural agricultural, food and
gardening products. The Company expects to expend approximately $150,000
over the next twelve months to develop this business.
Although the Company plans to continue to pursue its bids to deliver on-line
education programs to the ACSA and Rural Roots, it does not expect to have its
proposals accepted by these organizations within the next twelve months and the
Company does not expect to expend significant amounts in pursuit of these
proposals. Additionally, although the Company intends to pursue the development
of the EASI Studio in the event that it is successful in its initial endeavours
to develop computer video games and on-line education programs, the Company does
not expect to incur development costs for the studio over the next twelve
months.
Over the next twelve months the Company estimates that it will spend
approximately $1,000,000 in pursuing its stated plan of operations. Of this
amount, approximately $550,000 will be comprised of overhead expenses and
$450,000 will be spent in development of the Company's businesses. Actual
expenditures will depend on whether the Company is awarded any contracts for
on-line educational training, whether the Company is able to undertake the
development of any video games and the ability
-20-
of the Company to develop a natural agricultural, food and gardening business.
The Company's financial requirements are expected to increase if the Company is
able to enter into agreements that would enable it to pursue the development of
computer video games. There is no assurance that the Company will be able to
obtain the necessary financing to pursue its plan of operations due to its
limited cash reserves and its working capital deficit. The Company does not
have any financing arrangements in place and there is no assurance that adequate
financing may be obtained.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2004
REVENUES
- --------
The Company has not earned revenues from the sale of its products to date.
Further, the Company does not anticipate earning revenues until such time as it
has completed development of its on-line education products or any video game
products. The Company is presently in the initial stages of developing its
business and the Company can provide no assurances that it will be able to
complete development of its products or successfully sell or license those
products once development is complete.
OPERATING COSTS AND EXPENSES
- -------------------------------
The Company incurred operating expenses of $666,688 during the nine months ended
June 30, 2004, which was an increase of $21,720 over operating expenses of
$644,968 incurred by the Company during the nine months ended June 30, 2003.
During the three month period ended June 30, 2004 the Company incurred operating
expenses of $215,169, which was a decrease of $132,126 over operating expenses
of $347,295 incurred by the Company during the three month period ended June 30,
2003.
Consulting and professional fees were $539,741 and $177,070 for the nine month
and three month periods ended June 30, 2004, respectively. These were an
increase of $31,070 over the nine month period ended June 30, 2003 and a
decrease of $108,669 over the three month period ended June 30, 2003. This
large decrease in the three month period was the result of the use of several
additional consultants in the areas of computer video games and on-line
education in the previous period. The small overall increase between the nine
month periods has resulted from increased use of professional services and the
resulting fees required for listing and filing requirements.
Rent, utilities and telephone expenses were $90,556 and $18,250 for the nine
month and three month periods ended June 30, 2004, respectively. These were an
increase of $777 over the nine month period ended June 30, 2003 and a decrease
of $17,952 over the three month period ended June 30, 2003. A net decrease
resulting from the closing of one of the Company's offices in December 2003 was
offset by additional costs incurred in the use of the telephone for marketing
purposes. The large decrease in the three month period resulted from seeking
new offices and having minimal rent, as offices were switched.
Interest expense was $113,656 and $33,922 for the nine month and three month
periods ended June 30, 2004, respectively. This was an increase of $80,552 and
$33,408 over the nine month period ended June 30, 2004 and the three month
period ended June 30, 2003, respectively. The increase in interest results from
increased short term notes from related parties over the periods, until the
stock subscription agreements were issued in exchange for short term notes from
related parties in June 2004.
The Company does expect an increase in its operating costs over the course of
the next fiscal year as a result of pursuing its plan of operations.
-21-
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of $915 as of June 30, 2004 compared to a cash overdraft of
$514 as of June 30, 2003 and cash of $38,995 at September 30, 2003. The Company
had a working capital deficiency of $3,567,088 as of June 30, 2004 compared to a
working capital deficiency of $3,313,208 as of June 30, 2003 and a working
capital deficiency of $3,602,886 at September 30, 2003. As of June 30, 2004,
the Company had a net stockholders' deficiency of $3,567,088, including a loss
of $780,344 during the current period.
On June 14, June 15, June 22, June 23 and June 25, 2004 a total of $883,607 in
short-term loans were converted to stock subscription agreements issued to a
company owned by a creditor of the Company. On June 15, 2004 a total of 433,333
common shares were issued by the Company, having a fair value of $186,294, from
the total subscription agreements. Total common shares of the Company that are
required to be issued under the $697,313 in remaining subscription agreements
are 2,297,785.
Due to the Company's substantial working capital deficit and its current
inability to generate revenues, there is no assurance that the Company will be
able to continue as a going concern or achieve material revenues or profitable
operations. In addition, there can be no guarantee that financing adequate to
carry out the Company's business plan will be available on terms acceptable to
the Company or at all.
No material commitments for capital expenditures were made during the period
ended June 30, 2004.
EFFECT OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES
The Company's reporting and functional currency is the US dollar. Currently, all
of the Company's operations are located in Canada. Transactions in Canadian
dollars have been translated into U.S. dollars using the current rate method,
such that assets and liabilities are translated at the rates of exchange in
effect at the balance sheet date and revenue and expenses are translated at the
average rates of exchange during the appropriate fiscal period. As a result, the
carrying value of the Company's investments in Canada is subject to the risk of
foreign currency fluctuations. Additionally, any revenues received from the
Company's international operations in other than U.S. dollars will be subject to
foreign exchange risk.
RISK FACTORS
Stockholders and prospective purchasers of the Company's securities should
carefully consider the following risk factors in addition to the other
information appearing in this Quarterly Report on Form 10-QSB.
The Company May Not Be Able to Continue its Business as a Going Concern
- -----------------------------------------------------------------------
The Company's ability to continue as a going concern is dependent upon its
ability to obtain additional financing, restructure its debt, streamline its
business and reduce its costs. The Company is currently in the process of
identifying sources of additional financing, negotiating changes to its debt
structure and evaluating its strategic options. However, there are no assurances
that these plans can be accomplished on satisfactory terms, or at all, or that
they will provide sufficient cash to fund the Company's operations, pay the
principal of, and interest on, the Company's indebtedness, fund the Company's
other liquidity needs or permit the Company to refinance its indebtedness. The
Company's inability to obtain additional financing, restructure its
indebtedness, streamline its business or reduce its costs would have a material
adverse effect on the Company's financial condition, results of operations and
ability to satisfy
-22-
its obligations, and may result in the Company pursuing a restructuring of its
indebtedness either on a consensual basis or under the provisions of bankruptcy
legislation, or liquidating the Company's business and operations. Further, the
Company's inability to obtain additional financing or restructure its
indebtedness, or pursue a restructuring of its indebtedness either on a
consensual basis or under the provisions of bankruptcy legislation, may result
in the Company's securityholders losing all or a material portion of their
investment in the Company's securities.
The Company Requires Additional Financing in Order to Pursue Its Plan of
- --------------------------------------------------------------------------------
Operations
- ----------
The Company's plan of operations will require an estimated $1,000,000 to be
spent over the next 12 months. The Company's current operating funds are
insufficient to complete its plan of operations without additional financing.
The Company had no cash and a working capital deficit of $3,567,088 as of June
30, 2004. Due to the Company's substantial working capital deficit, the amount
of financing required to pursue its plan of operations and the Company's current
inability to generate revenues, the Company will require substantial financing
in order to pursue its plan of operations. In addition, there is no assurance
that the Company's actual cash requirements will not exceed its estimates. If
the actual cost of developing the Company's proposed video game and educational
software products is greater than expected, then the Company's ability to
complete its plan of operations may be adversely affected. If the Company is
unable to acquire sufficient financing on terms acceptable to it, the Company's
operations could be severely limited and the Company may not be able to
implement its plan of operations.
It is anticipated that any additional financing obtained by the Company will be
by way of equity financing through private placements of the Company's common
stock. If such equity financing is obtained, the interests of the Company's
existing stockholders may be diluted. The Company does not have any financing
arrangements in place at this time and there is no assurance that the Company
will be able to acquire sufficient financing on terms acceptable to it. No
commitments to provide additional funds have been made by the Company's
management or the Company's existing stockholders.
The Company May Not Meet Its Product Development Schedules or Complete
- --------------------------------------------------------------------------------
Development of Its Products.
- -------------------------------
Even if sufficient financing is obtained, there is no assurance that the Company
will be able to successfully develop any video game products, its on-line
educational software program or its planned natural food and gardening business.
Even if the Company is successful in developing any or all of its planned
products, there is no assurance that the Company will be able to deliver such
products at a reasonable cost. Failure to meet anticipated development
schedules may cause a shortfall in the Company's anticipated revenue and
profitability and cause the Company's operating results to be materially
different from expectations. If the platforms for which the Company is
developing products are not released when anticipated or do not attain wide
market acceptance, the Company's business could be materially harmed.
The Company May Not Be Able to Acquire the Necessary Computer Software Engines
- --------------------------------------------------------------------------------
to Complete Development of Video Game Products
- ----------------------------------------------------
The Company has not entered into any agreements with Mr. Peter Gardner to
acquire rights to either the Adam or Genesis software engines and there is no
assurance that the Company will be able to acquire rights to those software
engines. If the Company is unable to acquire rights to Adam or Genesis from Mr.
Gardner, then the Company's ability to pursue the development of video game
products will be adversely affected.
-23-
The Company May Not Be Able to Secure Agreements with Major Clients for Its
- --------------------------------------------------------------------------------
On-Line Educational Software Product
- ---------------------------------------
The Company has not entered into agreements with either the ACSA or Rural Roots
for the delivery of its on-line education programs and there is no assurance
that the Company will be able to enter into any agreements for the delivery of
its on-line education programs.
Limited Experience of Management
- -----------------------------------
The Company's officers and directors have limited experience in the area of
natural agricultural, food and gardening products. There is no assurance that
the Company has or will be able to acquire the skills and experience necessary
to enable the Company's business in this area to be profitable.
The Company Depends Upon a Small Number of Key Persons to Implement Its Business
- --------------------------------------------------------------------------------
Plan, and the Loss of Any of Them May Affect Its Business Operations
- --------------------------------------------------------------------------------
Company is dependent on the abilities and continued participation of a small
number of key consultants and management personnel to implement its business
plan and the loss of any of them would adversely affect the Company's ability to
successfully develop its products. There is no assurance that these key
employees and consultants will continue to be involved in the Company's affairs
in the future. The Company has not obtained key man insurance with respect to
any of its employees or consultants.
The Company May Not Be Able to Successfully Market Its Products Once They Are
- --------------------------------------------------------------------------------
Developed
- ---------
Even if the Company is successful in developing video game products or its
on-line educational software, there is no assurance that the Company will be
able to successfully commercialize and realize sales from those products. If
the Company is unable to successfully market any products that it develops, the
Company's business could be materially harmed.
The Company Operates in an Intensely Competitive Industry.
- -----------------------------------------------------------------
The computer video game industry is highly competitive with a number of well
established manufacturers. Many of these competitors have substantially greater
financial resources and experience in video game development and marketing and
have established distribution networks. There is no assurance that the Company
will be able to compete with established video game products and manufacturers
even if the Company is successful in developing any video game products.
The Company Has a Limited Operating History and the Company's Operating Results
- --------------------------------------------------------------------------------
Are Likely to Fluctuate Significantly which Could Increase the Volatility of Its
- --------------------------------------------------------------------------------
Stock Price.
- -------------
As a result of the Company's limited operating history and the planned expansion
of its business operations, the Company's quarterly and annual revenues and
operating results are likely to fluctuate from period to period. For this
reason, stockholders and prospective purchasers of the Company's securities
should not rely on period-to-period comparisons of the Company's financial
results as indications of future results. The Company's future operating
results could fall below the expectations of public market analysts or investors
and significantly reduce the market price of its common stock. Fluctuations in
the Company's operating results could increase the volatility of its stock
price. The Company has no history of developing video game products or on-line
education programs. Accordingly, there is a substantial risk that the Company
will not be able to successfully complete
-24-
development and commercialization of any video game products or on-line computer
education programs.
The Company is Subject to the SEC Penny Stock Rules, which May Reduce Trading of
- --------------------------------------------------------------------------------
Its Common Stock.
- -------------------
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in penny stocks. Penny stocks are generally equity securities
with a price of less than $5.00, other than securities registered on certain
national securities exchanges or quoted on the Nasdaq system, provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or system. The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from those rules, to deliver a standardized risk disclosure document prepared by
the Commission, which: (a) contains a description of the nature and level of
risk in the market for penny stocks in both public offerings and secondary
trading; (b) contains a description of the broker's or dealer's duties to the
customer and of the rights and remedies available to the customer with respect
to a violation of such duties or other requirements of Securities laws; (c)
contains a brief, clear, narrative description of a dealer market, including bid
and ask prices for penny stocks and significance of the spread between the bid
and ask price; (d) contains a toll-free telephone number for inquiries on
disciplinary actions; (e) defines significant terms in the disclosure document
or in the conduct of trading in penny stocks; and (f) contains such other
information and in such form as the Commission shall require by rule or
regulation. The broker-dealer also must, prior to effecting any transaction in
a penny stock, provide the customer with: (a) bid and offer quotations for the
penny stock; (b) the compensation of the broker-dealer and its salesperson in
the transaction; (c) the number of shares to which such bid and ask prices
apply, or other comparable information relating to the depth and liquidity of
the market for such stock; and (d) monthly account statements showing the market
value of each penny stock held in the customer's account. In addition, the
penny stock rules require that, prior to a transaction in a penny stock that is
not otherwise exempt from those rules, the broker-dealer must: (a) make a
special written determination that the penny stock is a suitable investment for
the purchaser and (b) receive from the purchaser his or her written
acknowledgement of receipt of the determination and a written agreement to the
transaction.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for our stock and therefore stockholders may
have difficulty selling those securities.
The Company Does Not Anticipate Paying Dividends to Its Security Holders in the
- --------------------------------------------------------------------------------
Foreseeable Future Which Makes Investment in Its Stock Speculative or Risky.
- --------------------------------------------------------------------------------
The Company has not paid dividends on its common stock and does not anticipate
paying dividends on its common stock in the foreseeable future. The Board of
Directors has sole authority to declare dividends payable to the Company's
stockholders. The fact that the Company has not and does not plan to pay
dividends indicates that the Company will use all of the funds generated by its
operations for reinvestment in its operating activities and also emphasizes that
the Company may not continue as a going concern. Investors must evaluate an
investment in the Company solely on the basis of anticipated capital gains.
ITEM 3. CONTROLS AND PROCEDURES.
As required by Rule 13a-15 of the Exchange Act, the Company carried out an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures as of June 30, 2004,
-25-
being the date of the Company's most recently completed fiscal quarter. This
evaluation was carried out under the supervision and with the participation of
the Company's Chief Executive Officer, Mr. Peter Gardner, and Chief Financial
Officer, Mr. Dean Branconnier. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting management to material
information relating to the Company and required to be included in the Company's
periodic SEC filings. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed on the Company's
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the Company's reports filed under the Exchange Act is accumulated
and communicated to management, including the Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure.
During the Company's most recently completed fiscal quarter ended June 30, 2004,
there were no changes in the Company's internal control over financial reporting
that have materially affected, or are reasonably likely to affect, its internal
control over financial reporting.
The term "internal control over financial reporting" is defined as a process
designed by, or under the supervision of, the registrant's principal executive
and principal financial officers, or persons performing similar functions, and
effected by the registrant's Board of Directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
(1) Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the registrant;
(2) Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the registrant are being made only in accordance with
authorizations of management and directors of the registrant; and
(3) Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the registrant's
assets that could have a material effect on the financial statements.
-26-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company, its officers and its directors were named in a lawsuit filed on
November 20, 2001 in the Supreme Court of British Columbia by Thermo Tech(TM)
Technologies Inc. and its subsidiaries (collectively, "Thermo Tech"). There are
a total of 75 defendants named in this lawsuit. Thermo Tech has alleged that
the Company and its officers and directors had appropriated corporate
opportunities from Thermo Tech through the unauthorized use of confidential
information and trade secrets owned by Thermo Tech.
On January 31, 2004 settlement agreements were reached in respect of this
lawsuit. Pursuant to these agreements, Thermo Tech has agreed to dismiss their
actions against the Company and its officers and directors. On June 24, 2004
all actions were dismissed against the Company and its officers and directors.
The Company had not expected any liability as a result of this lawsuit and
therefore had not made any accrual.
The Company and its subsidiary, Duro Enzyme Solutions Inc., were named in a
lawsuit on April 23, 2002 by F.L. Tech Inc., an Ontario company, and Robert
Jackman, a former director and the former president of the Company. F.L. Tech
and Mr. Jackman allege that the Company owes them $28,555 in unpaid consulting
fees. The Company feels that these allegations are without merit and is
defending the lawsuit accordingly.
Except as described above, to the knowledge of the Company's executive
management and directors, neither the Company nor its subsidiaries are party to
any other legal proceeding or litigation and none of its property is the subject
of a pending legal proceeding and the executive officers and directors know of
no other threatened or contemplated legal proceedings or litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company issued stock subscription agreements for unregistered sales of its
common stock during the fiscal quarter ended June 30, 2004. The common stock
issued contains rights and restrictions under rule 144.
On June 14, June 15, June 22, June 23 and June 25, 2004 a total of $883,607 in
short-term loans were converted to stock subscription agreements and issued to a
company owned by a creditor of the Company. On June 15, 2004 a total of 433,333
common shares were issued by the Company, having a fair value of $186,294 from
the total stock subscription agreements. Total common shares of the Company that
are required to be issued under the $697,313 in remaining stock subscription
agreements are 2,297,785.
The stock subscription agreements entered into had attached warrants for
exercise. The following warrants remain unexercised at June 30, 2004 are
available to be exercised until June 2005.
Exercise Price Amount of common shares
-------------- -----------------------
CDN $0.35 470,000
CDN $0.65 55,000
CDN $0.75 244,000
CDN $1.00 199,332
US $0.35 915,500
US $0.50 1,021,786
US $0.70 17,000
---------
Total 2,922,618
=========
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS AND INDEX OF EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B.
- ------------------------------------------------------------------------------------------------------
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER
- ------- ---------------------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation (2)
- ------- ---------------------------------------------------------------------------------------------
3.2 Amended and Restated Bylaws of the Company dated January 8, 2001 (3)
- ------- ---------------------------------------------------------------------------------------------
10.1 Termination of License Agreements between the Duro Enzyme Solutions Inc. (Nevada), Duro
Enzyme Solutions Inc. (B.C.) and 529473 B.C. Ltd. dated May 5, 2003 (1)
- ------- ---------------------------------------------------------------------------------------------
21.1 List of Subsidiaries (4)
- ------- ---------------------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (4)
- ------- ---------------------------------------------------------------------------------------------
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (4)
- ------- ---------------------------------------------------------------------------------------------
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (4)
- ------- ---------------------------------------------------------------------------------------------
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (4)
- ------------------------------------------------------------------------------------------------------
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(1) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registrant's Quarterly Report on Form 10-QSB filed on May 15, 2003.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to the Registrant's Quarterly Report on Form 10-QSB filed on August 14,
2003.
(3) Previously filed with the SEC as an exhibit to the Registrant's Annual
Report on Form 10-KSB filed on May 15, 2001.
(4) Filed as an Exhibit to this Quarterly Report on Form 10-QSB.
================================================================================
(b) CURRENT REPORTS ON FORM 8-K.
None.
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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.
ENTERTAINMENT, INC.
DATE: July 27, 2004 /S/ Peter Gardner
--------------- -----------------------------
Name: Peter Gardner
Title: President
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