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 September 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.
--------------------------------------------
(Name of small business issuer in its charter)
Colorado 47-0811483
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
703 Waterford Way, Suite 690, Miami, Florida 33126
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 374-2036
--------------------------
Issuer's telephone number
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 [ ]
Indicate by check mark whether the registrant is a shell company as defined by
Rule 12b-2 of the exchange Act. Yes [ ] No [X]
As of November 14, 2005, there were 7,652,357 outstanding shares of the issuer's
common stock, par value $0.001.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2005 (Unaudited)
And December 31, 2004...............................................3
Consolidated Unaudited Statements of Operations - For the three and
Nine Months Ended September 30, 2005
and September 30, 2004..............................................5
Consolidated Unaudited Statements of Cash Flows - For the
Nine Months Ended September 30, 2005
and September 30, 2004..............................................6
Notes to Consolidated Unaudited Financial Statements..................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............11
ITEM 3. CONTROLS AND PROCEDURES..............................................17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................19
ITEM 7. SIGNATURES...........................................................20
CERTIFICATIONS.......................................Filed as Exhibits 31 and 32
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
Consolidated Balance Sheets
As of As of
September 30, December 31,
2005 2004
----------- -----------
(unaudited) (see Note 2)
A S S E T S
Current Assets:
Cash $ 265,227 $ 233,456
Accounts receivable net of
allowance for doubtful accounts 262,010 452,294
Prepaid expenses 38,767 64,965
Other current assets 8,755 6,121
----------- -----------
Total Current Assets 574,759 756,836
Property & Equipment
Office Improvements 22,981 42,701
Computer Equipment 2,562,513 2,347,665
Furniture & Fixtures 262,691 260,724
Other 234,883 227,755
----------- -----------
3,083,068 2,878,845
Less accumulated depreciation (2,586,268) (2,193,068)
----------- -----------
Total Property & Equipment 496,800 685,777
Other Assets
Software developed for licensing, net 1,238,070 501,973
Other assets 123,298 130,015
----------- -----------
Total Other Assets 1,361,368 631,988
----------- -----------
Total Assets $ 2,432,927 $ 2,074,601
=========== ===========
See accompanying notes to consolidated financial statements.
3
As of As of
September 30, December 31,
2005 2004
----------- -----------
(unaudited) (see Note 2)
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt $ 209,953 $ 664,946
Accounts payable and accrued expenses 489,308 437,851
Customer deposit 275,000 147,000
Estimated losses on Internet security
service project -- 116,942
Current portion of capital lease
Obligation 81,190 90,614
Income Taxes Payable 84,802 84,802
Deferred Rent 18,605 36,849
----------- -----------
Total Current Liabilities 1,158,858 1,579,004
----------- -----------
Capital lease obligations, excluding current
portion 7,717 68,999
Long-term debt -- 257,870
Customer deposit 275,000 --
----------- -----------
282,717 326,869
----------- -----------
Total Liabilities 1,441,575 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; 7,652,357 and 7,639,477
issued and outstanding, respectively 7,653 7,640
Additional paid in capital 2,241,901 2,251,027
Accumulated deficit (1,258,202) (2,083,119)
Treasury Stock, none and 34,100 shares,
respectively, at Cost -- (6,820)
----------- -----------
Stockholders' Equity 991,352 168,728
----------- -----------
Total Liabilities and
Stockholders' Equity $ 2,432,927 $ 2,074,601
=========== ===========
See accompanying notes to consolidated financial statements.
4
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Total Revenues $ 1,018,378 $ 942,684 $ 3,287,804 $ 3,161,334
Cost of Sales 373,207 573,943 1,066,596 1,841,563
----------- ----------- ----------- -----------
Gross Profit 645,171 368,741 2,221,208 1,319,771
Expenses
Uncollectible Fees Written Off -- 13,372 -- 43,372
Depreciation & Amortization 125,328 167,741 378,171 422,971
Rents 57,475 55,578 167,289 166,250
Professional Fees 37,269 48,077 103,055 217,287
Financial & Investor Relations 13,546 12,024 37,791 27,851
Administrative Expenses 71,079 48,996 203,309 144,807
Moving and Relocation Expenses -- (58,000) -- (58,000)
Advertising and Marketing 37,047 34,012 137,175 88,894
Wages and Salaries 141,663 269,464 403,943 751,446
Settlement of estimated loss
on Internet Security Services project -- -- (116,942) --
----------- ----------- ----------- -----------
Total Expenses $ 483,407 $ 591,264 $ 1,313,791 $ 1,804,878
----------- ----------- ----------- -----------
Income (Loss) from Operations 161,764 (222,523) 907,417 (485,107)
Other Income(Expenses)
Loss on Disposal of Assets -- -- (25,058) --
Interest(Expense) (13,007) (36,430) (64,108) (80,333)
Interest Income 4,194 606 6,666 1,713
----------- ----------- ----------- -----------
Total Other Income (Expenses) (8,813) (35,824) (82,500) (78,620)
----------- ----------- ----------- -----------
Income (Loss) Before Taxes 152,951 (258,347) 824,917 (563,727)
Provision for Income Tax -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) $ 152,951 $ (258,347) $ 824,920 $ (563,727)
=========== =========== =========== ===========
Basic and Diluted Earnings per share:
Basic Income (Loss) Per Share $ 0.02 $ (0.03) $ 0.11 $ (0.06)
Diluted Income (Loss) Per Share $ 0.02 $ -0-(1) $ 0.10 $ -0-(1)
Basic and Diluted Weighted Average Shares
Basic 7,666,710 7,759,477 7,676,728 9,324,493
Diluted 7,952,834 -- 7,962,852 --
- ------------
(1) The effect of common stock options and warrants are excluded from diluted
loss per share as their inclusion would be anti-dilutive for the three
month and nine month periods ending September 30, 2004.
See accompanying notes to consolidated financial statements.
5
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC. & SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30
----------------------------
2005 2004
----------- -----------
Cash Flows from Operating Activities
Net Income (Loss) $ 824,917 $ (563,727)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 499,363 925,893
Uncollectible Fees Written Off -- 20,617
Interest income -- (189)
Loss on disposal of property 31,638 --
Gain on settlement on Internet Security
Project (116,942) --
Change in Operating Assets & Liabilities
Accounts Receivable 190,284 114,800
Prepaid Expenses 26,198 (47,825)
Other Current Assets (2,634) (2,378)
Other Assets 6,717 168
Accounts Payable and Accrued Expenses 51,457 (26,544)
Deferred Rent (18,244) (17,494)
Customer Deposits, net 403,000 --
----------- -----------
Net Cash Provided by Operating Activities 1,895,754 403,321
----------- -----------
Cash Flows from Investing Activities
Purchase of Equipment And Software (220,833) (73,872)
Development of Software (857,288) (350,179)
----------- -----------
Net Cash Used in Investing Activities (1,078,121) (424,051)
----------- -----------
Cash Flows from Financing Activities
Payments on capital lease obligations (70,706) (55,179)
Proceeds from Notes Payable 50,000 500,000
Payments on Notes Payable (762,863) (421,740)
Issuance of common stock 10,200 --
Acquisition of Treasury Stock (12,493) (200,000)
----------- -----------
Net Cash Used in Financing Activities (785,862) (176,919)
----------- -----------
Increase (Decrease) in Cash & Cash Equivalents 31,771 (197,649)
Cash at Beginning of Period 233,456 434,895
----------- -----------
Cash at End of Period $ 265,227 $ 237,246
=========== ===========
Disclosures from Operating Activities:
Interest Expense Paid $ 64,108 $ 80,333
Schedule of Noncash Investing and Financing Transactions
During the nine months ended September 30, 2005, the Company retired $19,313 of
treasury stock.
During the nine months ended September 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.
6
During the nine months ended September 30, 2004, the Company acquired computer
equipment through long-term debt in the amount of $234,580.
During the nine months ended September 30, 2004, the Company entered into a
capital lease agreement for the acquisition of property and equipment amounting
to $38,002.
During the nine months ended September 30, 2004, $6,250 of notes payable were
converted into 25,000 shares of common stock.
See accompanying notes to consolidated financial statements.
7
GLOBAL ENTERTAINMENT HOLDINGS/EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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, N.V.,
(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 future years, 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 $584,099. Debt payments of $209,953 and capital lease obligations of $81,190
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 nine months ended September 30, 2005
are not necessarily indicative of the results that may be expected for the year
8
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.
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
$31,872 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. On August 17, 2005,
the outstanding balance on this note was paid in full.
9
NOTE 5- INCOME TAXES
No provision for income taxes has been reflected for the three and nine months
ended September 30, 2005 as the company has sufficient net operating loss carry
forwards to offset taxable income. As of September 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.
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 9/30 Nine months ended 9/30
---------------------------- ----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income (loss) available to common shareholders:
As reported $ 152,951 $ (258,347) $ 824,920 $ (563,727)
Deduct stock based compensation (14,404) (7,441) (33,274) (23,323)
----------- ----------- ----------- -----------
Pro forma $ 138,547 $ (265,788) $ 791,646 $ (587,050)
----------- ----------- ----------- -----------
Basic earnings (loss) per share:
Common share as reported 0.02 (0.03) 0.11 (0.06)
Common share pro forma 0.02 (0.03) 0.10 (0.06)
Diluted earnings (loss) per share:
Common share as reported 0.02 (0.03) 0.10 (0.06)
Common share pro forma 0.02 (0.03) 0.10 (0.06)
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 209.2% and 98.7% for 2005 and 2004, and a
remaining life of the option ranging from 6 to 10 years for 2005 and 2004.
10
NOTE 7- ECONOMIC DEPENDENCE
One licensee accounted for 100% of consolidated net revenues for the nine month
period ending September 30, 2005. In the corresponding period of fiscal year
2004, 96% 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
-------------- ------------ -----------
Nine Months Ended September 30, 2005
Revenues $ -- $ 3,287,804 $ 3,287,804
Net Income (Loss) from operations (1,823,510) 2,730,927 907,417
Total Assets 464,880 1,968,047 2,432,927
Depreciation and Amortization* 62,874 436,489 499,363
Nine Months Ended September 30, 2004
Revenues $ -- $ 3,161,334 $ 3,161,334
Net Income (Loss) from operations (1,604,193) 1,040,466 (563,727)
Total Assets 504,303 1,811,745 2,316,048
Depreciation and Amortization* 120,905 804,988 925,893
Three Months Ended September 30, 2005
Revenues $ -- $ 1,018,379 $ 1,018,379
Net Income (Loss) from operations (669,636) 831,400 161,764
Total Assets 464,880 1,968,047 2,432,927
Depreciation and Amortization* 21,923 140,873 162,796
Three Months Ended September 30, 2004
Revenues $ -- $ 942,684 $ 942,684
Net Income (Loss) from operations (670,989) 412,642 (258,347)
Total Assets 500,356 1,815,692 2,316,048
Depreciation and Amortization* 52,390 274,569 326,959
- ------------
* includes amounts charged to cost of sales
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 nine months ended September 30, 2005, the Company received $550,000
in deposits from its Licensee. Under the terms of the deposits with its
Licensee, $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.
11
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 nine month period
ended September 30, 2005.
12
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, 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
technology-driven subsidiaries that license, develop and host interactive
digital entertainment software applications. Currently our product line is
focused on the online gaming sector. Our services are technology based only. We
do not manage, operate or own any gaming or wagering activities or entities.
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 Internet and telephony
based gaming software. Other services offered to licensees include custom
software development and website design services. IGW derives its revenues from
licensing fees, software royalties and consulting services.
Prevail Online, Inc., ("Prevail") our wholly owned subsidiary, a Colorado
corporation, is inactive and during the nine months ended September 30, 2005,
had no revenues.
Through IGW, 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 players. Our online
Sportsbook, Racebook and Casino software systems are complemented by the player
Loyalty software, the Webmaster Affiliate software and the Call Center software.
13
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.
Outlook
- -------
Our improved profitability in the current year as compared to the prior year is
primarily due to the reduced amortization of our legacy product, which became
fully amortized in the first quarter of this year, and the reduction of payroll
expense, which costs are being allocated to the development of our new product
referred to as "Tyche." Tyche is expected to be placed in service in the latter
part of the fourth quarter of this year and amortization of the development
costs will be charged to expense over thirty six months. Development costs are
capital in nature compared to maintenance costs which must be expensed. As a
result of these items, we anticipate the current year to show a substantially
higher profit from operations compared to past and potentially future periods.
Revenues for 2005 are expected to be slightly higher in comparison to 2004
levels. We anticipate the increase in revenue as a result of a new licensee
contract signed in September, 2005 and equipment sales. We have not received any
revenues from the new licensee in the current period; however we anticipate
earning revenue from this licensee in the fourth quarter of 2005. Additionally,
we continue to target new geographic sales areas. Through the services of an
experienced and well known sales and marketing firm in Europe, we expect to make
headway in reaching these targeted markets.
In an effort to maintain and grow our revenues, we are looking at enhancing our
product offerings through integration and reselling other gaming products.
During this reporting period, we released new casino games in partnership with
Next Generation Gaming and Real Time Gaming. Earlier in the year, we released
our wireless product offering in partnership with Phantom Fiber. Additionally,
during 2004 and as noted above, 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, 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. Further, we
anticipate continued profitability in future years.
Stock Repurchase - Settlement Agreement
- ---------------------------------------
On November 27, 2002, we filed a complaint against a shareholder and former
officer. On March 25, 2004, we entered into a settlement agreement with the
former officer and several entities in relation to this matter. Under the terms
of the agreement, we redeemed and cancelled 2,859,919 shares of our common stock
for total consideration in cash and non-interest bearing notes payable of
$644,000. During the current reporting period, we redeemed and cancelled an
additional 55,520 shares of our common stock for total consideration paid in
cash of $12,493 for those shares.
14
Results of Operations
- ---------------------
Recurring Licensing Fees decreased $44,487 to $805,897 from $850,384 for the
three months ended September 30, 2005 compared to 2004. Recurring Licensing Fees
decreased $334,720, to $2,608,438 from $2,943,155 for the nine months ending
September 30, 2005 compared to 2004. This decrease in revenue resulted from two
licensees who cancelled in 2004. Hosting services revenue increased $285,800,
from $190,911 to $476,711 for the nine months ending September 30, 2005 compared
to 2004. For the three months ended September 30, 2005 compared to 2004, Hosting
Services revenue increased $75,523 from $88,300 to $163,823. This increase in
Hosting Services revenue is from a revision of our fee structure to more
appropriately match revenues with costs.
Revenues for the three and nine months ended September 30, 2005 and 2004 were
composed of the following elements:
Three months ended 9/30 Nine months ended 9/30
2005 2004 2005 2004
---------- ---------- ---------- ----------
Recurring Licensing Fees $ 805,897 $ 850,384 $2,608,435 $2,943,155
License Fees -- -- 2,000 23,268
Hosting Services 163,823 88,300 476,711 190,911
Other Revenue 48,657 4,000 200,658 4,000
---------- ---------- ---------- ----------
Total $1,018,378 $ 942,684 $3,287,804 $3,161,334
Cost of sales decreased from 60.9% of sales for the three months ended September
30, 2004, to 36.6% for the three months ended September 30, 2005. Cost of sales
decreased from 58.3% of sales for the nine months ending September 30, 2004, to
32.4% for the nine months ending September 30, 2005. The primary reason for 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. Hosting services expenses increased $56,202 for the three months ended
September 30, 2005 and $113,733 for the nine months ending September 30, 2005
compared to the same periods in 2004. The increase in Hosting Services expenses
resulted from increased bandwidth costs. Reduced licensing costs from third
parties partially offset the increased costs. The decrease in salaries included
in cost of revenues, resulted from the capitalization of salary expense in
software development instead of software maintenance activities.
Internet security services, as described more fully below, was a new product
offering in 2004. We are focusing on mitigation of distributed denial of service
attacks. There were no costs associated with this activity in the prior periods,
as this product was rolled out in the quarter ended September 30, 2004. The
costs of $124,892 for the three months ended September 30, 2004 and $210,012 for
the nine months ended September 30, 2004, are for bandwidth, network management
and hosting facilities associated with this product line.
15
The following amounts compose cost of sales for each period:
Three months ended 9/30 Nine months ended 9/30
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Amortization of
Proprietary Software $ 37,467 $ 159,218 $ 121,191 $ 504,381
Hosting Services 121,125 64,923 358,775 245,042
Software support and maintenance 64,469 22,209 102,953 75,707
Salaries 150,146 202,701 483,677 806,421
Internet Security Services -- 124,892 -- 210,012
---------- ---------- ---------- ----------
Total $ 373,207 $ 573,943 $1,066,596 $1,841,563
Expenses decreased $107,857 for the three months ended September 30, 2005 to
$483,407 compared to $591,264 in 2004. Expenses decreased $491,087 for the nine
months ended September 30, 2005 to $1,313,791 compared to $1,804,878 in 2004.
Without the impact of the recovery of the reserve for the estimated loss on the
Internet Security Services project discussed below, expenses were $374,145 lower
for the nine months ended September 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 $48,281 for
the nine months ended September 30, 2005 to $137,175 from $88,894 for the nine
months ended September 30, 2004, and $3,035 for the three months ended September
30, 2005 to $37,047 compared to $34,012 in 2004, as part of our efforts to
expand sales. Administrative expenses increased $22,083 for the three month
period ended September 30, 2005 to $71,079 from $48,996 in 2004. Administrative
expenses increased $58,502 for the nine month period ended September 30, 2005 to
$203,309 compared to $144,807 in 2004. These increases were a result of
increased expenditures in our data processing infrastructure and the engagement
of outside consultants in lieu of staff expansion. These increased costs were
partially offset by Florida sales and property tax refunds for economic
incentive programs from the local and state government. Wages and Salaries
decreased $127,801 and $347,503 for the three and nine months ended September
30, 2005 compared to the same periods in 2004, as a result of cost cutting
measures taken in reduced staffing and a shift to outsourcing certain
development activity. It is not anticipated that we will have any further
staffing cost reductions in future periods at our present revenue level. We
anticipate our current staffing level will remain constant.
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
16
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 nine month period
ended September 30, 2005.
Interest expense decreased $23,423 to $13,007 from $36,430 for the three months
ending September 30, 2005 compared to 2004, and decreased $16,225, to $64,108
from $80,333 for the nine months ending September 30, 2005 compared to 2004. The
reduced interest expense resulted from retirement of debt incurred in 2003 and
2004.
Interest income increased as a result of investing excess cash funds into
overnight and short term commercial paper and money market accounts.
Liquidity and Capital Resources
- -------------------------------
Our principal source of short term liquidity is operating cash flow. A
substantial decrease in revenues would 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 $1,895,754 for the nine months
ended September 30, 2005 as compared to $403,321 for the nine months ended
September 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 $1,078,121 and $424,051
for the nine months ended September 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 nine months ended September 30,
2005 amounted to $785,862, and for the nine months ended September 30, 2004
amounted to $176,919. Net cash used in financing activities for the nine months
ended September 30, 2005, was primarily attributable to the payments on notes
payable. Net cash used by financing activities for the same period in 2004 was
primarily attributable to the acquisition of treasury stock along with proceeds
from the issuance of notes payable less payments on notes payable and capital
leases.
17
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.
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.
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.
18
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Reference is made to the Company's Proxy Statement dated September 27, 2005. The
Proxy Statement was filed in connection with the Company's annual shareholders
meeting which was held on October 13, 2005. At such annual shareholder's
meeting, the following items were submitted to a vote of shareholders with the
following results as noted:
1.PROPOSAL NO. 1:
To elect the Board of Directors, each to serve until the next Annual Meeting of
the shareholders or until their respective successors are elected and qualify;
A total of 5,754,302 shares were represented with respect to this matter, with
voting on each specific nominee as follows:
BROKER
Board Nominees FOR AGAINST WITHHELD NON-VOTES
- -------------- --- ------- -------- ---------
Bryan Abboud 5,686,302 68,000 -0- --
James Doukas 5,686,302 68,000 -0- --
Thomas Glaza 5,686,302 68,000 -0- --
Dave Outhwaite 5,686,302 68,000 -0- --
2.PROPOSAL NO. 2:
To ratify and approve the selection by the Board of Directors of Mahoney Cohen &
Company, CPA, P.C. as the Company's independent accountants for the current
year;
All matters submitted to a voter were approved by the shareholders. A total of
5,702,330 votes were represented with respect to this matter, with a total of
5,686,302 shares voting for the proposal, 68,000 shares voting against the
proposal, and no broker non-votes or shares abstaining from voting.
All matters submitted to a vote of security holders were approved.
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 are incorporated herein by reference.
19
EXHIBIT NO. DOCUMENT
----------- --------
Exhibit 3.1 * Articles of Incorporation
Exhibit 3.2 * By-Laws
Exhibit 22.1 Proxy Statement on Schedule 14A filed on September 30,
2005 is incorporated herein by reference.
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 did not file any reports on Form 8-K during the quarter for
which this form is filed.
20
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: November 14, 2005
Global Entertainment Holdings/Equities, Inc.
By: /s/ Bryan P. Abboud
-------------------------------------
Bryan P. Abboud
President, Chief Executive Officer and
Director (Principal Executive Officer)
By: /s/ Clinton H. Snyder
---------------------------------------
Clinton H. Snyder
Chief Financial Officer
(Principal Financial and
Accounting Officer)