U.S. 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 quarterly period ended June 30, 2005.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ____________ to ____________ .
Commission file number: 0-27637
Global Entertainment Holdings/Equities, Inc.
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(Name of small business issuer in its charter)
Colorado 47-0811483
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
703 Waterford Way, Suite 690, Miami, Florida 33126
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (305) 374-2036
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of August 17, 2005, there were 7,652,357 outstanding shares of the issuer's
common stock, par value $0.001.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - June 30, 2005 (Unaudited)
And December 31, 2004...............................................3
Consolidated Unaudited Statements of Operations - For the Three
and Six Months Ended June 30, 2005 and June 30, 2004................4
Consolidated Unaudited Statements of Cash Flows - For the
Six Months Ended June 30, 2005 and June 30, 2004....................5
Notes to Consolidated Unaudited Financial Statements..................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............10
ITEM 3. CONTROLS AND PROCEDURES..............................................14
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS..........15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................15
CERTIFICATIONS
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, AS OF DECEMBER 31,
2005 2004
--------------- ------------------
(UNAUDITED) (SEE NOTE 2)
A S S E T S
Current Assets:
Cash $ 591,518 $ 233,456
Accounts receivable net of
allowance for doubtful accounts 394,242 452,294
Prepaid expenses 35,594 64,965
Other current assets 6,877 6,121
----------- -----------
Total Current Assets 1,028,231 756,836
Property & Equipment
Office Improvements 22,981 42,701
Computer Equipment 2,535,039 2,347,665
Furniture & Fixtures 261,217 260,724
Other 233,240 227,755
----------- -----------
3,052,477 2,878,845
Less accumulated depreciation (2,453,046) (2,193,068)
----------- -----------
Total Property & Equipment 599,431 685,777
Other Assets
Software developed for licensing, net 952,495 501,973
Other assets 119,789 130,015
----------- -----------
Total Other Assets 1,072,284 631,988
----------- -----------
Total Assets $ 2,699,946 $ 2,074,601
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt $ 360,500 $ 664,946
Accounts payable and accrued expenses 692,552 437,851
Customer deposit 275,000 147,000
Estimated losses on Internet security
service project -- 116,942
Current portion of capital lease
Obligation 87,106 90,614
Income Taxes Payable 84,802 84,802
Deferred Rent 20,355 36,849
----------- -----------
Total Current Liabilities 1,520,315 1,579,004
----------- -----------
Capital lease obligations, excluding current
portion 26,077 68,999
Long-term debt 27,860 257,870
Customer deposit 275,000 --
----------- -----------
328,937 326,869
----------- -----------
Total Liabilities 1,849,252 1,905,873
----------- -----------
Stockholders' Equity
Preferred Stock, 25,000,000 Shares Authorized,
None Issued -- --
Common Stock, 100,000,000 Shares Authorized
Par Value of $.001; 7,705,377 and 7,639,477
issued and outstanding, respectively 7,706 7,640
Additional paid in capital 2,254,141 2,251,027
Accumulated deficit (1,411,153) (2,083,119)
Treasury Stock, none and 34,100 shares,
respectively, at Cost -- (6,820)
----------- -----------
Stockholders' Equity 850,694 168,728
----------- -----------
Total Liabilities and
Stockholders' Equity $ 2,699,946 $ 2,074,601
=========== ===========
See accompanying notes to consolidated financial statements.
3
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -------------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Total Revenues $ 1,213,001 $ 1,016,737 $ 2,269,426 $ 2,218,650
Cost of Sales 285,705 708,926 693,389 1,267,620
----------- ----------- ----------- -----------
Gross Profit 927,296 307,811 1,576,037 951,030
Expenses
Uncollectible Fees Written Off -- 30,000 -- 30,000
Depreciation & Amortization 108,784 131,949 252,843 255,230
Occupancy Expense 52,538 55,583 109,814 110,672
Professional Fees 45,870 63,501 65,786 169,210
Financial & Investor Relations 14,626 2,959 24,245 15,828
Administrative Expenses 46,095 32,269 132,230 95,812
Advertising and Marketing 50,792 43,618 100,128 54,883
Wages and Salaries 135,106 224,634 262,280 481,982
Settlement of estimated loss
on Internet Security Services project (116,942) -- (116,942) --
----------- ----------- ----------- -----------
Total Expenses $ 336,869 $ 584,513 $ 830,384 $ 1,213,617
----------- ----------- ----------- -----------
Income (Loss) from Operations 590,427 (276,702) 745,653 (262,587)
Other Income(Expenses)
Loss on Disposal of Assets (25,058) -- (25,058) --
Interest(Expense) (21,760) (32,893) (51,101) (43,903)
Interest Income 1,644 634 2,472 1,107
----------- ----------- ----------- -----------
Total Other Income (Expenses) (45,174) (32,259) (73,687) (42,796)
----------- ----------- ----------- -----------
Income (Loss) Before Taxes 545,253 (308,961) 671,966 (305,383)
----------- ----------- ----------- -----------
Net Income (Loss) $ 545,253 $ (308,961) $ 671,966 $ (305,383)
=========== =========== =========== ===========
Basic and Diluted Earnings Per Share $ 0.07 $ (0.04) $ 0.09 $ (0.03)
Basic and Diluted Weighted Average
Shares
Basic 7,719,991 7,759,477 7,681,614 9,152,149
Diluted 7,877,422 7,759,477 7,839,045 9,152,149
See accompanying notes to consolidated financial statements.
4
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30
-------------------------------
2005 2004
----------- -----------
Cash Flows from Operating Activities
Net Income (Loss) $ 671,966 $ (305,383)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 336,567 598,935
Provision for Bad Debts -- 30,000
Interest income -- (189)
Gain on disposal of property 25,058 --
Gain on settlement on Internet Security
Project (116,942) --
Change in Operating Assets & Liabilities
Accounts Receivable 58,052 80,836
Other Current Assets 29,371 (9,018)
Prepaid Expenses (756) (25,943)
Other Assets 10,226 1,374
Accounts Payable and Accrued Expenses 254,701 (88,215)
Deferred Rent (16,494) (11,662)
Customer deposits 403,000 --
----------- -----------
Net Cash Provided by
Operating Activities $ 1,654,749 $ 270,735
----------- -----------
Cash Flows from Investing Activities
Purchase of equipment and software (191,556) (59,583)
Development of software (534,245) (230,970)
----------- -----------
Net Cash Used in Investing Activities $ (725,801) $ (290,553)
----------- -----------
Cash Flows from Financing Activities
Payments on capital lease obligations (46,430) (36,316)
Proceeds from Notes Payable 50,000 500,000
Payments on Notes Payable (584,456) (265,355)
Issuance of common stock 10,000 6,250
Acquisition of Treasury Stock -- (200,000)
----------- -----------
Net Cash Provided by (Used in)
Financing Activities $ (570,886) $ 4,579
----------- -----------
Increase (Decrease) in Cash & Cash Equivalents 358,062 (15,239)
Cash & Cash Equivalents at
Beginning of Period 233,456 434,895
----------- -----------
Cash & Cash Equivalents at
End of Period $ 591,518 $ 419,656
=========== ===========
Supplemental Disclosures of cash flow information:
Interest Paid $ 51,101 $ 43,903
Supplemental Disclosures
Schedule of Noncash Investing and Financing Transactions
During the six months ended June 30, 2005, the Company retired $6,820 of
treasury stock.
During the six months ended June 30, 2004, the Company settled a lawsuit with a
former shareholder. The settlement resulted in the Company acquiring the
outstanding shares of the former shareholder in exchange for cash in the amount
of $200,000 and notes payable amounting to $400,911.
During the six months ended June 30, 2004, the Company acquired computer
equipment through long-term debt in the amount of $234,580.
During the six months ended June 30, 2004, the Company entered into a capital
lease agreement for the acquisition of property and equipment amounting to
$38,002.
$6,250 of notes payable were converted into 25,000 shares of common stock.
See accompanying notes to consolidated financial statements.
5
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
(UNAUDITED)
NOTE 1 - GENERAL
The Company was incorporated on July 10, 1997, in Colorado as Masadi Resources,
Inc. On February 10, 1998, the name was changed to International Beverage
Corporation. On August 27, 1998, International Beverage Corporation merged with
Global Entertainment Holdings/Equities, Inc., and subsequently the surviving
corporation became known as Global Entertainment Holdings/Equities, Inc.
Principles of Consolidation
The Company currently has two wholly owned subsidiaries; IGW Software, Inc.,
(IGW), a Netherlands Antilles Corporation in Curacao, Netherlands Antilles, and
Prevail Online, Inc., (Prevail), a Colorado Corporation. IGW is engaged in the
conception and creation of digital entertainment software programs for the
gaming and wagering industry. Prevail was purchased in August of 1999 and it is
currently inactive and has no revenues. The accompanying consolidated financial
statements include the accounts of the company and its wholly-owned
subsidiaries. Inter-company transactions and balances have been eliminated in
consolidation.
Liquidity
During the year ended December 31, 2004, the Company had incurred a substantial
loss. Historically, the Company has relied on operating cash flows for its
liquidity. If revenues do not increase in 2005, this could impact the funds from
operating cash flow and jeopardize the Company's ability to meet current
obligations. In addition, the Company has a working capital deficiency of
$492,084. Debt payment of $360,500 and capital lease obligations of $26,077 are
due within the next year. Management is implementing various cost saving
programs as a result of these factors and believes that third and related party
financing will be available to enable the Company to continue as a going
concern. Additionally, officers of the Company have indicated that they will
provide up to $350,000 of funding to the Company.
NOTE 2 - BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2005. The December 31, 2004 balance sheet was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim consolidated financial statements. For
further information, the statements should be read in conjunction with the
financial statements and notes thereto included in the Company's financial
statements and notes included in Form 10-KSB, for the year ended December 31,
2004.
6
NOTE 3 - COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are suppliers of software and hosting services
to the internet gaming industry, but the Company does not manage, operate or own
any gaming or wagering activities or entities. Some governmental jurisdictions,
such as the United Kingdom, have adopted legislation to regulate internet
gaming, whereas others are considering its prohibition. The uncertainty
surrounding the regulation or prohibition of internet gaming could have a
material adverse effect on the Company's business, revenues, operating results
and financial condition.
NOTE 4- LONG-TERM DEBT
In February 2005, the Company's CEO advanced $50,000, which is payable in
monthly installments of $3,119 including interest at 15%, and is due in August
2006. Included in the current portion of long term debt is the balance due of
$33,711 on this obligation.
In December 2004, the Company entered into a financing agreement with a
shareholder by which the shareholder advanced the Company $100,000. The note is
payable in monthly installments of $6,238.48, including interest at 15%, and is
due June 30, 2006
In April 2004, the Company entered into a financing agreement with a shareholder
and a licensee by which the shareholder advanced the Company $300,000 and the
licensee advanced $200,000. The note to the shareholder is payable in monthly
installments of $18,295 including interest at 12%, and is due September 2005.
The note to the licensee was repaid in April, 2005, pursuant to the receipt of a
deposit discussed in Note 10.
The proceeds of the notes were used for working capital and as down payment on
the settlement agreement discussed below in Note 9.
Additionally, pursuant to the agreement entered into on March 24, 2004, in
connection with our entry into the internet security service industry, the
Company acquired computer equipment through a long-term debt obligation in the
amount of $234,580. This obligation is payable in monthly installments of
$11,043, including interest at 12% and is due April 2006. Subsequent to June 30,
2005, the outstanding balance on this note was paid in full.
NOTE 5- INCOME TAXES
No provision for income taxes has been reflected for the six months ended June
30, 2005 as the company has sufficient net operating loss carry forwards to
offset taxable income. As of June 30, 2005, the valuation allowance offsets the
total net deferred tax asset balance.
NOTE 6- STOCK BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", (SFAS 123), the Company has elected
to account for stock options issued to employees under Accounting Principles
Board Opinion No. 25, (APB 25), and related interpretations. The Company
accounts for stock options issued to consultants and for other services in
accordance with SFAS 123.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123" as amended by FASB Statements No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148")), provides an
alternative to APB 25 in accounting for stock based compensation issued to
employees. SFAS 123 provides for a fair value based method of accounting for
employee stock options and similar equity instruments. However, for companies
that continue to account for stock based compensation arrangements under APB 25,
SFAS 123 requires disclosure of the pro forma effect on net income and earnings
per share as if the fair value based method prescribed by SFAS 123 had been
applied. The Company intends to continue to account for stock based compensation
arrangements under APB No. 25 and has adopted the pro forma disclosure
requirements of SFAS 123.
7
Had compensation expense been recorded for the Company's awards based on fair
value as calculated using the "Black Scholes" Model at the grant dates
consistent with the methodologies of SFAS No. 123, the Company's reported net
income (loss) available to common shareholders and earnings per share would have
been reduced to the pro forma amounts indicated below:
THREE MONTHS ENDED 6/30 SIX MONTHS ENDED 6/30
---------------------------- ----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income (loss) available to
common shareholders:
As reported $ 545,253 $ (308,961) $ 671,966 $ (305,383)
Deduct stock based compensation (7,849) (7,441) (14,592) (15,882)
----------- ----------- ----------- -----------
Pro forma 537,404 (316,402) $ 657,374 (321,265)
----------- ----------- ----------- -----------
Basic earnings (loss) per share:
Common share as reported 0.07 (0.03) 0.09 (0.03)
Common share pro forma 0.07 (0.03) 0.09 (0.03)
Diluted earnings (loss) per share:
Common share as reported 0.07 (0.03) 0.09 (0.03)
Common share pro forma 0.07 (0.03) 0.09 (0.03)
Under SFAS 123, the value of options granted during 2005 and 2004 was estimated
on the date of grant using the Black Scholes model with the following
assumptions: Risk-free interest rate 4% for 2005 and 2004, dividend yield - 0%
for 2005 and 2004, volatility 98.7% and 86% for 2005 and 2004, and a remaining
life of the option ranging from 6 to 10 years for 2005 and 2004.
NOTE 7- ECONOMIC DEPENDENCE
One licensee accounted for 100% of consolidated net revenues for the six month
period ending June 30, 2005. In the corresponding period of fiscal year 2004,
83.6% of consolidated revenues were accounted for by this licensee. The loss of
this licensee would jeopardize our ability to continue as a going concern.
NOTE 8- SEGMENT INFORMATION
The Company groups its business into two geographic segments; The United States
of America and Curacao, Netherlands Antilles.
SOFTWARE
MANAGEMENT DEVELOPMENT
AND MARKETING (NETHERLANDS
SERVICES (USA) ANTILLES) TOTAL
-------------- ------------- -----------
Three Months Ended June 30, 2005
Revenues $ -- $ 1,213,001 $ 1,213,001
Operating Income(Loss) (1,147,637) 1,738,064 590,427
Total Assets 669,446 2,030,500 2,699,946
Depreciation and Amortization 21,290 125,367 146,657
Three Months Ended June 30, 2004
Revenues $ -- $ 2,218,650 $ 2,218,650
Operating Income(Loss) (158,741) (117,961) (276,702)
Total Assets 565,887 2,134,162 2,700,049
Depreciation and Amortization 39,122 260,224 299,346
Six Months Ended June 30, 2005
Revenues $ -- $ 2,269,426 $ 2,269,426
Operating Income(Loss) (1,153,875) 1,899,528 745,653
Total Assets 669,446 2,030,500 2,699,946
Depreciation and Amortization 40,951 295,616 336,567
Six Months Ended June 30, 2004
Revenues $ -- $ 2,218,650 $ 2,218,650
Operating Income(Loss) (902,543) 639,956 (262,587)
Total Assets 577,606 2,134,162 2,700,049
Depreciation and Amortization 68,431 531,962 600,393
8
NOTE 9- SETTLEMENT AGREEMENT
On November 27, 2002, the Company filed a complaint against a shareholder and
former officer. On March 25, 2004, the Company entered into a settlement
agreement in relation to this matter. The agreement provides for total
consideration in cash and notes payable of $644,000. As part of the settlement,
the Company received 2,859,919 shares of its common stock which have been
cancelled.
NOTE 10 - CUSTOMER DEPOSITS
During the six months ended June 30, 2005, the Company received $550,000 in
deposits from its Licensee. Under the terms of these deposits, $275,000 is
payable to the Licensee within six months of acceptance of the Company's release
of its new software, Tyche. The balance is due on termination of the software
licensing agreement.
NOTE 11 - SETTLEMENT OF ESTIMATED LOSS ON INTERNET SECURITY PROJECT
During the year ended December 31, 2004, the Company invested funds in an
Internet Security Service Project. In connection with this project, the Company
acquired computer equipment and software and entered into various contracts for
bandwidth, network management and hosting facilities with a remaining
contractual obligation of fifteen months as of December 31, 2004. During the
fourth quarter ended December 31, 2004, the Company determined that the costs
associated with this activity would likely exceed the future benefits. In the
year ending December 31, 2004, the Company recognized the losses associated with
the cancellation of contractual obligations and the impairment losses related to
the computer equipment and software. In May and June of this year, the Company
reached settlements with the former vendors involved at amounts below what had
been estimated, and accordingly, a recovery on the obligation established at
December 31, 2004, has been presented as a negative amount in the general and
administrative expenses in the statement of operations for the period ended June
30, 2005.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
As used herein, the term "Company," "we," "our," and "us" refers to Global
Entertainment Holdings/Equities, Inc., and its subsidiaries and predecessors,
unless otherwise indicated.
Forward-Looking Information
This report contains a number of forward-looking statements, which reflect the
Company's current views with respect to future events and financial performance
including statements regarding the Company's projections, and the interactive
gaming industry. These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or those anticipated. In this report, the words
"anticipates", "believes", "expects", "intends", "future", "plans", "targets"
and similar expressions identify forward-looking statements. Readers are
cautioned to not place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. The Company makes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that may arise after the date hereof.
Additionally, these statements are based on certain assumptions that may prove
to be erroneous and are subject to certain risks including, but not limited to,
the Company's dependence on limited cash resources, its economic dependence on a
major licensee, and its dependence on certain key personnel within the Company.
Accordingly, actual results may differ, possibly materially, from the
predictions contained herein.
Business Overview
- -----------------
We provide business development support and administrative assistance for our
technology-driven subsidiary that licenses, develops and hosts interactive
digital entertainment software applications. Our services are technology based
only. We do not manage, operate or own any gaming or wagering activity or
entity.
We generate our operating revenues exclusively from IGW Software, N.V., ("IGW")
our wholly owned subsidiary, a Netherlands Antilles corporation. IGW is engaged
in the development, licensing and hosting of proprietary interactive digital
entertainment software. Other services offered to licensees include custom
software development and professional services. IGW derives its revenues from
licensing fees and consulting services.
Prevail Online, Inc., ("Prevail") our wholly owned subsidiary, a Colorado
corporation, is inactive and during the six months ended June 30, 2005, had no
revenues.
We have created a suite of gaming software products to offer our licensees
better risk management, ease of use and a back office product that simplifies
player and gaming oversight. Our software offers a fully automated online
entertainment experience for the licensee's player. Our online Sportsbook,
Racebook and Casino software systems are complemented by the player Loyalty
software, the Webmaster Affiliate software, wireless access, Interactive Poker
and the Call Center software. All software products are integrated, enabling
players to access all of an operator's affiliated websites seamlessly, using a
single account. This integrated feature results in higher revenues for our
licensees, as a result of giving players easier access to a larger variety of
activities. Further, the single account and integrated features allow our
licensees to better adapt to their players' focus, through better analysis of
players usage across all properties.
10
Outlook
- -------
Revenues for 2005 are expected to be the same or slightly higher in comparison
to 2004 levels. We anticipate our growth coming from new licensees. During the
six months ended June 30, 2005, we have not received any revenues from new
licensees. In an effort to increase revenues, we have increased our sales and
marketing budget for 2005 compared to our expenditures in 2004. We continue to
target new geographic sales areas and through the services of an experienced and
well known sales and marketing firm in Europe we expect to make headway in
reaching this market.
In an effort to maintain and grow our revenues, we are looking at enhancing our
product offerings through co-branding, and/or reselling other gaming products.
During this reporting period, we released our wireless product offering in
partnership with Phantom Fiber. Additionally, during 2004 and as planned in the
first three quarters of 2005, we have and will continue to devote the majority
of our software development efforts to our next generation platform, a new and
dynamic interactive digital entertainment product referenced as Tyche. With the
release of this new product, scheduled to occur in the fourth quarter of this
year, we anticipate access to new opportunities as a result of the rich features
and functionality of Tyche.
We continue to reduce and control costs to keep expenses in line with revenues.
We anticipate maintaining our profitability through the end of 2005.
Results of Operations
- ---------------------
Recurring Licensing Fees increased $51,549 to $1,064,674 from $1,013,125 for the
three months ended June 30, 2005 compared to 2004. Recurring Licensing Fees
decreased 7%, or $138,232, to $1,954,538 from $2,092,770 for the six months
ending June 30, 2005 compared to 2004. Hosting services revenue increased
$210,276, from $102,612 to $312,888 for the six months ended June 30, 2005
compared to 2004. For the three months ended June 30, 2005 compared to 2004,
Hosting Services revenue increased $144,718 from $3,612 to $148,330. This
increase is from a revision of our fee structure to more appropriately match
revenues with costs.
Revenues for the three and six months ending June 30, 2005 and 2004 were
composed of the following elements:
THREE MONTHS ENDED 6/30 SIX MONTHS ENDED 6/30
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Recurring Licensing Fees $1,064,674 $1,013,125 $1,954,538 $2,092,770
Initial License Fees -- -- 2,000 23,268
Hosting Services 148,330 3,612 312,888 102,612
---------- ---------- ---------- ----------
Total $1,213,001 $1,016,737 $2,269,426 $2,218,650
Cost of sales decreased from 69.7% of sales for the three months ended June 30,
2004, to 23.6% for the three months ended June 30, 2005. Cost of sales decreased
from 57.1% of sales for the six months ended June 30, 2004, to 30.6% for the six
months ended June 30, 2005. The decrease occurred in our amortization of
Proprietary Software, which was due to the expiration of amortization in 2004 of
substantial capitalized costs incurred in 2001. Software support and maintenance
decreased $31,077, from $48,699 to $17,622 for the three months ended June 30,
2005 compared to the same period in 2004. For the six months ended June 30, 2005
compared to the six months ended June 30, 2004, software support and maintenance
decreased $109,002, from $138,617 to $29,615. This decrease occurred as a result
of reduced licensing costs from third parties. Hosting services increased
$24,424 for the three months ended June 30, 2005 and $57,530 for the six months
ended June 30, 2005 compared to the same periods in 2004. The increase in
Hosting Services resulted from increased bandwidth costs and a revision of costs
to more appropriately match costs with revenues. The decrease in salaries
resulted from the capitalization of salary expense in development in lieu of
salaries associated with maintenance activities.
11
The following amounts comprise cost of sales for each period:
THREE MONTHS ENDED 6/30 SIX MONTHS ENDED 6/30
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Amortization of
Proprietary Software $ 37,873 $ 167,397 $ 83,724 $ 345,163
Hosting Services 101,634 77,210 237,650 180,120
Software support and maintenance 17,622 48,699 29,615 138,617
Salaries 128,576 415,620 342,400 603,720
---------- ---------- ---------- ----------
Total $ 285,705 $ 708,926 $ 693,389 $1,267,620
Expenses decreased $247,644 for the three ended June 30, 2005 compared to 2004.
Expenses decreased $383,233 for the six months ended June 30, 2005 compared to
2004. Expenses, without the impact of the recovery of the reserve for the
estimated loss on the Internet Security Services project discussed below, were
$130,702 lower for the three months ended June 30, 2005 and $266,291 lower for
the six months ended June 30, 2005. These decreases resulted from reduced
Professional fees, Advertising and Marketing expenses, Administration Expenses
and Wage expenses. Professional fees decreased as a result of lower legal
services, primarily due to the settlement reached with the former officer and
shareholder in May, 2004. Advertising and Marketing increased $45,245 for the
six months ended June 30, 2005 compared to the six months ended June 30, 2004
and $7,174 for the three months ended June 30, 2005 compared to 2004, as part of
our efforts to expand sales. Administrative expenses increased $22,654 for the
three month period ended June 30, 2005 compared to 2004. Administrative expenses
increased $45,246 for the six month period ended June 30, 2005 compared to 2004.
These increases were a result of increased expenditures in our data processing
infrastructure. Wages and Salaries decreased $89,528 and $219,702 for the three
and six months ended June 30, 2005 compared to the same periods in 2004, as a
result of cost cutting measures taken in reduced staffing. It is not anticipated
that we will have any further staffing cost reductions in future periods at our
present revenue levels.
During the year ended December 31, 2004, we invested funds in an Internet
Security Service Project, which was intended initially to serve our primary
client and then to be marketed to third parties. In connection with this
project, we acquired computer equipment and software and entered into various
contracts for bandwidth, network management and hosting facilities with a
remaining contractual obligation of fifteen months as of December 31, 2004.
During the fourth quarter ended December 31, 2004, we determined that the costs
associated with this structure would likely exceed the future benefits. As a
result of this analysis, we came to the decision of canceling this activity and
replacing it with a more viable alternative solution. In the year ending
December 31, 2004, we recognized the losses associated with the cancellation of
contractual obligations and the impairment losses related to the computer
equipment and software. We have engaged other vendors to supplement our Internet
Security activities to maintain the service to our current clients and to offer
the service as a competitive advantage to new clients. In May and June of this
year, we reached settlements with the former vendors involved at amounts below
what we had estimated, and accordingly, we have recorded a recovery on the
obligation established at December 31, 2004. In addition, as a result of the
settlement with the vendors, we have received a credit for previously expensed
costs of services provided by those vendors and we have determined that certain
software purchased specifically for our internet security service project will
not be utilized under our new provisioning of the service.
The settlement of estimated loss on cancellation of the Internet Security
Service project is presented as a negative amount in the general and
administrative expenses in the statement of operations for the period ended June
30, 2005.
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Interest expense decreased $11,133 to $21,760 from $32,893 for the three months
ending June 30, 2005 compared to 2004, and increased $7,198, to $51,101 from
$43,903 for the six months ending June 30, 2005 compared to 2004. The reduced
interest expense for the three months ended June 30, 2005, resulted from
retirement of debt incurred in 2004. For the three months ended June 30, 2004,
we had retired $403,453 of debt while for the three months ended March 31, 2005,
we retired $181,000 of debt.
Net income for the six months ended June 30, 2005, was $671,966 compared to a
net loss of $(305,383) for the same period in 2004. The difference of $977,349
in net income for the six months ended June 30, 2005 compared to the net loss
for the same period in 2004, can be attributed to the following areas:
Reduced depreciation and amortization (this includes
amortization included in cost of sales and amortization
and depreciation included in expenses) $262,368
Reduced Salary Expense from increased capitalized
software development costs 268,890
Recovery of anticipated loss on internet
security services 116,942
Reduced legal and professional fees 103,424
Reduced administration wages and salaries 219,702
Other 6,023
--------
Total difference $977,349
We anticipate that upon completion of our new platform, Tyche, the positive
impact from reduced amortization and increased capitalized software development
costs will not be available in future periods.
Liquidity and Capital Resources
- -------------------------------
Our principal source of short term liquidity is operating cash flow. A
substantial decrease in revenues could impact the funds from operating cash flow
and jeopardize our ability to meet current obligations. We do not have a credit
line or any alternative means of short term funding. We believe that current
operating cash flows are sufficient to meet our working capital needs.
Net cash provided from operating activities was $1,654,749 for the six months
ended June 30, 2005 as compared to $270,735 for the six months ended June 30,
2004. The increase in net cash provided from operating activities primarily
resulted from net income and one time customer net deposits of $403,000.
Net cash used in investing activities in the amount of $725,801 and $290,553 for
the six months ended June 30, 2005 and 2004, was composed of the purchase of
fixed assets and the capitalization of software development costs in both
periods.
Net cash used in financing activities for the six months ended June 30, 2005
amounted to $570,886, while net cash provided by financing activities for the
six months ended June 30, 2004 totaled $4,579. Net cash used in financing
activities for the six months ended June 30, 2005, was primarily attributable to
the payments on notes payable, while net cash provided by financing activities
for the same period in 2004 was primarily attributable to proceeds from notes
payable.
Critical Accounting Policies and Estimates
- ------------------------------------------
Our significant accounting policies are described in Note 1 to the consolidated
financial statements included in our annual report filed on form 10-KSB for the
year ended December 31, 2004. The accounting policies used in preparing our
interim 2005 consolidated financial statements are the same as those described
in our annual report.
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We believe the critical accounting policies listed below affect significant
judgments and estimates used in the preparation of our consolidated financial
statements, although they are not all inclusive.
Revenue Recognition. We recognize revenues in accordance with the provisions of
the American Institute of Certified Public Accountants' Statement of Position
(SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9,
as well as Technical Practice Aids issued from time to time by the American
Institute of Certified Public Accountants, and in accordance with the Securities
and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements." We license software under non-cancelable royalty
agreements and provide related professional services, including consulting,
training, and implementation services, as well as ongoing customer support and
maintenance. Consulting and training services are not essential to the
functionality of our software products
Software Development Costs. Software development costs are expensed as incurred
until technological feasibility is established. Software development costs
incurred subsequent to establishing technological feasibility are capitalized
and amortized over their three year estimated useful lives. Management is
required to use professional judgment in determining whether development costs
meet the criteria for immediate expense or capitalization.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our licensees to make
required payments. If the financial condition of our licensees were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required or revenue could be deferred until
collectibility becomes probable.
ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this quarterly report, the Company's Chief
Executive Officer and its Chief Financial Officer evaluated the Company's
disclosure controls and procedures as required pursuant to Rule 13a-14 under the
Securities and Exchange Act of 1934, as amended. Under rules promulgated by the
SEC, disclosure controls and procedures are defined as those "controls or other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms." Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer determined
that such controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's periodic SEC filings. There were no changes in internal controls and
procedures since the date of the evaluation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have issued and sold unregistered securities that have not previously been
reported as set forth below. An underwriter was not utilized in any of these
transactions. The recipients of securities in each transaction represented their
intention to acquire the securities without a view to distribution. All the
issued securities were restricted securities under Rule 144, Reg. D or Reg. S
regulations, and appropriate restrictive legends were affixed to the securities
in each transaction. All sales of securities were to accredited investors in
private placements, and accordingly all of the sales complied with Section 4(2)
as well as 4(6) of the Securities Act of 1933.
On March 28, 2005, we issued 100,000 shares of common stock under a private
placement subscription at a price of $0.10 per share. These securities were
issued in a transaction exempt from registration under the Securities Act of
1933 in reliance on Sections 4(2) and 4(6) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
Exhibits marked with an asterisk have been filed previously with the Commission
and incorporated herein by reference.
EXHIBIT NO. DOCUMENT
----------- --------
Exhibit 3.1 * Articles of Incorporation
Exhibit 3.2 * By-Laws
Exhibit 31.1 Certification of CEO Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of CFO Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
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
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
(b) The Company filed the following reports on Form 8-K during the quarter for
which this form is filed:
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on
Form 10-QSB to be executed on its behalf by the undersigned, hereunto duly
authorized.
Date: August 22, 2005
Global Entertainment Holdings/Equities, Inc.
/s/ Bryan P. Abboud
- -------------------
Bryan P. Abboud
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Clinton H. Snyder
- ---------------------
Clinton H. Snyder
Chief Financial Officer
(Principal Financial and Accounting Officer)
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