UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2001
OR
[ ] 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: 0-27256
-------------------------------
ONLINE GAMING SYSTEMS, LTD.
(Exact name of small business issuer as specified in its charter)
DELAWARE 65-0512785
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
3225 McLeod Drive 1st Floor, Las Vegas, Nevada 89121
(Address of principal executive offices)
Registrant's telephone no., including area code: (702) 836-3042
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the 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 [ ]
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.
Class Outstanding as of May 14, 2001
- ------------------------------ ------------------------------
Common Stock, $.001 par value 15,169,180
TABLE OF CONTENTS
Heading Page
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements.................................................2
Consolidated Balance Sheet - March 31, 2001 (Unaudited)............3-4
Consolidated Statement of Income-Three Months Ended March
31, 2001 and 2000 (Unaudited)........................................5
Consolidated Statement of Cash Flows - Three Months ended
March 31, 2001 and 2000 (Unaudited)..................................6
Notes to Consolidated Financial Statements (Unaudited).............7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................9
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings...................................................10
Item 2. Changes In Securities...............................................10
Item 3. Defaults Upon Senior Securities.....................................10
Item 4. Submission of Matters to a Vote of Securities Holders...............10
Item 5. Other Information ..................................................10
Item 6. Exhibits and Reports on Form 8-K....................................10
Signatures..........................................................11
PART 1
Item 1. Financial Statements
The following unaudited financial Statements for the period
ended March 31, 2001, have been prepared by Online Gaming
Systems, Ltd. (the "Company") and Subsidiaries.
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
Financial Statements
March 31, 2001
2
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF MARCH 31, 2001
Assets:
Current Assets:
Cash $ 418,363
Other Current Assets 21,049
----------
Total Current Assets 439,412
----------
Property and Equipment - Net 265,441
----------
Equipment under Capitalized Lease - Net 118,475
----------
Other Assets 265,003
----------
Total Assets $1,088,331
==========
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
3
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF MARCH 31, 2001
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 795,187
Notes Payable - Officers 187,350
Convertible Notes Payable - Related Party 4,199,907
Note Payable 289,268
Current Portion of Capital Lease Obligations 101,810
------------
Total Current Liabilities 5,573,522
Capital Lease Obligations 33,282
------------
5,606,804
Total Liabilities
Stockholders' Equity:
Convertible Preferred Stock - Par Value $.001 Per Share;
Authorized 10,000,000 Shares, Issued and Outstanding,
9,000 shares [Liquidation Preference $ 900,000] 9
Common Stock - Par Value $.001 Per Share;
Authorized 100,000,000 Shares, Issued - 15,169,180 Shares 15,169
Additional Paid-in Capital 14,862,532
Treasury Stock, 811,767 Common Shares - At Cost (1,730,488)
Accumulated [Deficit] (17,665,695)
------------
Total Stockholders' Equity (4,518,473)
------------
Total Liabilities and Stockholders' Equity $ 1,088,331
============
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
4
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months ended
March 31,
-------------------------------
2001 2000
------------ -------------
Revenue $ 225,105 $ 1,315,129
Cost of Sales 9,058 108,823
Gross Profit 216,047 1,206,306
------------ ------------
Operating Expenses:
General and Administrative 742,435 1,296,286
Depreciation and Amortization 59,982 36,518
------------ ------------
Total Operating Expenses 802,417 1,332,804
------------ ------------
[Loss] from Operations (586,370) (126,498)
------------ ------------
Other [Expenses] Income:
Interest Expense (130,795) (9,351)
Debt Settlement 78,142 --
------------ ------------
Other [Expenses] Income - Net (52,653) (9,351)
------------ ------------
[Loss] from Operations Before
Income Tax [Benefit] Expense (639,023) (135,849)
Income Tax [Benefit] Expense -- --
------------ ------------
[Loss] from Operations $ (639,023) $ (135,849)
------------ ------------
Net [Loss] $ (639,023) $ (135,849)
Preferred Stock Dividend in Arrears 11,250 12,500
------------ ------------
Net [Loss] Available to
Common Stockholders $ (650,273) $ (148,349)
------------ ------------
Basic and Diluted Net [Loss]
Per Share of Common Stock $ (0.04) $ (0.01)
Weighted Average Shares of Common
Stock Outstanding-Basic and Diluted 14,955,925 13,484,670
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
5
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31,
---------------------------
2 0 0 1 2 0 0 0
------------ -----------
Operating Activities:
[Loss] Income from Continuing Operations $ (639,023) $ (135,849)
Adjustments to Reconcile Net [Loss] Income to
Net Cash [Used for] Operating Activities:
Depreciation and Amortization 59,982 36,518
Changes in Assets and Liabilities:
[Increase] Decrease in:
Prepaid Expenses -- 5,834
Other Assets 688 (5,885)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (354,336) 58,222
----------- -----------
Net Cash - Continuing Operations (932,689) (41,160))
----------- -----------
Investing Activities - Continuing Operations:
Purchase of Patents and Licenses (125,000) --
Purchase of Property, Equipment, and Capitalized Software -- (22,338)
----------- -----------
Net Cash - Investing Activities $ (125,000) $ (22,338)
----------- -----------
Financing Activities - Continued Operations:
Proceeds from Issuance of Common Stock -- 250,000
Proceeds from Sale of Treasury Stock 14,062 --
Increase in Loan Payable to Officer 65,000 96,350
Proceeds from Note Payable - Related Party 1,303,642 --
Proceeds from Note Payable 125,000 --
Payment of Lease Payable (14,581) (21,740)
Payment of Note Payable (50,000) (5,850)
----------- -----------
Net Cash - Financing Activities 1,443,123 318,760
----------- -----------
[Decrease] Increase in Cash and Cash Equivalents 385,434 255,262
Cash and Cash Equivalents - Beginning of Period 32,929 (173,875)
----------- -----------
Cash and Cash Equivalents - End of Period $ 418,363 $ 81,387
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 4,795 $ 8,751
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Conversion of Preferred Stock into Common Stock $ -- $ 455
Issuance of Common stock for Cancellation of Preferred Stock $ 500
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements
6
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
Note 1 - Basis of Preparation
--------------------
The accompanying unaudited interim financial statements
include all adjustments (consisting only of those of a normal
recurring nature) necessary for a fair statement of the
results for the interim periods. The results of operations for
the three-month period March 31, 2001, are not necessarily
indicative of the results of operations to be reported for the
full year ending December 31, 2001. These statements should be
read in conjunction with the summary of significant accounting
policies and notes contained in the corporation's annual
report on form 10-K for the year ended December 31, 2000.
Note 2 - Major Customers
---------------
Income fees derived from customers are evenly concentrated
amongst numerous customers.
Note 3 - Convertible Note Payable - Related Party
----------------------------------------
The Company's operating shortfalls have largely been funded
via its largest shareholder, Hosken Consolidated Investment
Limited (HCI). HCI is a South Africa-based investment holding
company that focuses its activities in telecommunications and
information technology, media and broadcasting, interactive
gaming and entertainment and financial services. During 2000,
HCI funded the Company $2,335,000 in the form of convertible
notes. These notes bear an interest rate of 12 percent, have a
maturity date of December 31, 2000 and are collateralized by
substantially all of the assets of the Company. At December
31, 2000, the Company had not repaid the outstanding principal
balance and interest and was in technical default of the note
payable agreement. HCI has informed the Company that it plans
to convert the notes into equity at a future date, at a price
to be determined.
During the first quarter of 2001, HCI advanced the Company
$1,303,042 in convertible notes and funds, and has stated its
intent on continuing the funding of the Company through the
balance of the year. During the second quarter of 2001, HCI
advanced the Company about $1 million in convertible notes.
Note 4 - Capital Stock
-------------
During fiscal 2000, the Company issued 375,000 shares of its
common stock in connection for consulting services rendered in
obtaining and negotiating convertible debt financing. The
value of the 375,000 shares was based on the market value per
common share of approximately $2.00 at the date of issuance.
Accordingly, the Company recorded an expense of $750,000 for
the year ended December 31, 2000 associated with these
consulting services.
7
In February 2000, the Company issued 100,000 shares of its
common stock in exchange for a $150,000 investment [fair value
of common stock at date of issuance] from an individual
investor.
In March 2000, the Company issued 100,000 shares of its common
stock in connection with a $100,000 borrowing obtained from a
customer of the Company. The fair value of the common stock
issued was approximately $100,000.
In April 2000, the Company issued 25,000 shares of its common
stock in exchange for consulting services which has been
recorded as a $ 25,000 expense in fiscal 2000.
In the first quarter 2001 the Company issued 500,000 shares of
its common stock to the Shaar fund to repurchase outstanding
preferred stock.
Note 5 - Per Share Data
--------------
Per share data are based on the weighted average number of
common shares outstanding during the respective periods. The
diluted net income per share is based upon the options issued
and outstanding as well as the assumed conversion of the
Company's issued and outstanding preferred stock.
Note 6 - Business Agreements
-------------------
On January 2000, the company entered into an exclusive
agreement with Inter Global Fund for the worldwide rights for
the sale of its products to Internet based casinos not
attached to a land based casino. This agreement was terminated
during 2000.
On March 30, 2001 the Company executed a formal agreement with
Australian On-Line Casino Ltd. (AOC) and Casino Australia
On-Line Pty Ltd (CAO), its subsidiary for the licensing and
distribution of our products. AOC holds an online casino and
bookmaking license from the Australian Territory of Norfolk
Island. AOC is seeking to establish itself as a global
marketer and supplier of Internet gaming services.
Generally, the Company granted to AOC an exclusive license to
distribute our software products in the Asia Pacific region,
and non-exclusive rights to distribute other products. To
retain this exclusivity in this territory, AOC must meet
minimum sales thresholds, at recommended sales prices approved
by us. We obtained certain non-exclusive rights to distribute
new products that CAO creates.
The agreement calls for $250,000 in cash, plus ongoing
royalties associated with sales revenue, service revenue and
hosting revenue. Additionally, the Company will receive an
option for 5,000,000 shares of AOC stock. AOC is planning a
50,000,000 share offering to raise $10,000,000 (Australian).
The transaction is subject to a number of conditions,
including the successful public offering of AOC, and the
certification of our ICE software by the appropriate
Australian authority. The transaction is expected to be
completed during the second or third quarter of this year.
8
Note 8 - Subsequent Events
-----------------
During the first quarter of 2001, HCI provided notice to the
Company of its intention to convert its 9,000 shares of
preferred stock to common stock, under formula as provided in
the Convertible Preferred Stock Sales Agreement. If HCI
ultimately converts all of its preferred stock, it will cause
significant dilution to the Company's outstanding shares.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Result of Operations
--------------------
Three Months Ended March 2001 and 2000
--------------------------------------
Net Revenues. The Company's revenues decreased approximately 83% in
2001 over the same period in 2000. Revenues from operations in the
first quarter 2001 were $ 225,105 as compared with $ 1,315,129 for the
same period in 2000. The decrease in revenues was attributable to a
significant decrease in sales of our software products. During the
first quarter of 2001, we allocated resources to increased product
development, and the moratorium imposed by the government of Australia
on new casino licenses (since May 2000) may have also impacted sales of
our products.
Revenue received during the first quarter of 2001 emanated primarily
from recurring software royalty fees, and the initial order for our
gaming devices.
Operating Expenses. Operating expenses decreased by 40% or $ 530,387 in
the first quarter 2001 over the same period in 2000. The decrease was
largely due to cost cutting efforts, expenses related to product
development, decreased support staffing and the company relocating its
operation to Las Vegas, during the third quarter of 2000.
Other Income. Included in other income is a final settlement of an
amount owed to a advertising vendor for services rendered. The amount
paid was $112,500 in full and final settlement of a total amount owing
of $190,912. The Company has taken a more aggressive posture in
managing and resolving its accounts payable, and anticipates future
settlements on past outstanding amounts.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents totaled $418,363 at March 31, 2001 compared
to $81,387 at March 31, 2000. The increase in cash and cash equivalents
was due primarily due to funding received from the Company's largest
stockholder, HCI of about $1,300,000 offset by negative cash flow from
operations. Management believes that cash generated from future
operations and continuing participation of HCI and, potentially other
investors will be sufficient to satisfy the Company's current
anticipated cash requirements.
9
ONLINE GAMING SYSTEMS, LTD. AND SUBSIDIARIES
PART II
Item 1. Legal Proceedings
During the first quarter of 2001, we reached mutually
satisfactory resolutions involving litigation with Kelley and
Kelley Advertising, Inc. and Olshan Grundman Frome Rosenzweig
& Wolosky LLP. Subsequent to the first quarter of 2001, we
reached mutually satisfactory resolutions involving litigation
with Keane, Inc. and Wayne Newton. We issued 225,000 shares of
stock to resolve the case with Mr. Newton.
The Company recently received notice of a judgement in favor
of Actrade, in the amount of $139,062. This judgement was
apparently handed down in March of 2000, and relates to a
company payable for a trade acceptance draft. The Company
intends on reaching a mutually satisfactory arrangement with
the plaintiff on this matter.
The Company is involved in various other legal proceedings
that arise in the normal course of business. We could incur
significant legal fees in connection with these matters but
based on currently available information, the resolutions of
these cases is not likely to have a material adverse effect on
our business, financial position or future results of
operations.
Item 2. Changes in Securities
This Item is not applicable to the Company.
Item 3. Defaults upon Senior Securities
This Item is not applicable to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
This Item is not applicable to the Company.
Item 5. Other Information
This Item is not applicable to the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Form 8-K - July 7, 1999
10
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: May 14, 2001
Online Gaming Systems, Ltd.
By: /s/ Gary Ramos
----------------------------
(Signature)
Gary Ramos, President / Chief Executive Officer
By: /s/ Lawrence P. Tombari
----------------------------
(Signature)
Lawrence P. Tombari , Chief Financial Officer
11