UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER 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
Commission file number000-25853
ELECTRONIC GAME CARD, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0570975
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
19th Floor, 712 5th Avenue, New York, NY 10019
(Address of Principal Executive Offices)
(646) 723-8946
(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 |_|
Traditional small business disclosure format Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: October 30, 2005 25,325,928
PART I
ITEM 1. FINANCIAL STATEMENTS
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2005 2004
----------- -----------
ASSETS:
CURRENT ASSETS:
Cash & Cash Equivalents $ 6,768,803 $ 1,082,558
Accounts Receivable 200,738 80,250
Deposit on Inventory 493,182 141,800
Value Added Tax Receivable 31,673 46,235
Related Party Receivable 145,845 61,560
Note Receivable 1,352 143,468
----------- -----------
Total Current Assets 7,641,593 1,555,871
----------- -----------
PROPERTY AND EQUIPMENT:
Plant and Machinery Equipment 23,022 7,185
Office Equipment 60,927 58,987
Furniture & Fixtures 1,195 366
Less: Accumulated Depreciation (41,459) (25,819)
----------- -----------
Net Fixed Assets 43,685 40,719
----------- -----------
OTHER ASSETS
Investment in Joint Venture 994,060 1,000,000
----------- -----------
TOTAL ASSETS $ 8,679,338 $ 2,596,590
----------- -----------
2
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
June 30, December 31,
2005 2004
------------ ------------
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable $ 456,261 $ 620,736
Accrued Payroll Liabilities -- 41,087
Unearned Revenue 255,645 62,370
------------ ------------
Total Current Liabilities 711,906 724,193
------------ ------------
NON-CURRENT LIABILITIES:
Convertible Note Payable, net 8,,144,975 --
Interest Payable 272,385 --
------------ ------------
Total Non-Current Liabilities 8,417,360 --
------------ ------------
TOTAL LIABILITIES 9,129,266 724,193
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, Par Value $.001,
Authorized 100,000,000 shares
Issued 25,325,157and 24,936,928 shares at
June 30, 2005 and December 31, 2004 25,325 24,937
Paid-In Capital 12,505,552 12,207,471
Stock Subscription Receivable -- (139,189)
Currency Translation Adjustment (513,178) (513,178)
Retained Deficit (157,495) (157,495)
Deficit Accumulated During the Development Stage (12,310,132) (9,550,149)
------------ ------------
TOTAL STOCKHOLDERS'S EQUITY ,(449,928) 1,872,397
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'S EQUITY $ 8,679,338 $ 2,596,590
============ ============
The accompanying notes are an integral part of these financial statements.
3
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Cumulative
Since
April 6, 2000
For the Three Months Ended For the Nine Months Ended Inception of
Serptember 30, September 30, Development
2005 2004 2005 2004 Stage
------------ ------------ ------------ ------------ ------------
Revenue: $ 96,255 $ -- $ 232,875 $ 80,250 $ 321,442
Cost of Good Sold 77,625 -- 191,673 -- 258,828
------------ ------------ ------------ ------------ ------------
Gross Profit (Loss) 18,630 -- 41,202 80,250 62,614
------------ ------------ ------------ ------------ ------------
Expenses:
Selling and Marketing Expense 134,565 270,159 284,610 621,893 1,408,654
General & Administrative 139,746 284,092 786,528 525,207 2,021897
Consulting Expenses 390,236 367,815 690,918 938,827 2,651,887
Salaries and Wages 221,661 166,722 592,067 629,260 1,748,395
Compensation from issuance of
Options/Warrants -- -- -- -- 4,099,852
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 887,208 1,088,788 2,354,123 2,715,187 11,930,685
------------ ------------ ------------ ------------ ------------
Loss from Operations (868,578) (1,088,788) (2,312,921) (2,634,937) (11,868,071)
Other Income (Expense)
Currency Translation (20,203) -- (22,799) -- (22,799)
Interest, Net (227,103) (801) (424,263) 8,020 (416,496)
Settlement of Litigation -- -- -- -- 42,154
------------ ------------ ------------ ------------ ------------
Net Loss from Continuing Operations
before Taxes (1,115,884) (1,089,589) (2,759,983) (2,626,917) (12,265,667)
Income Taxes -- -- -- -- (455)
------------ ------------ ------------ ------------ ------------
Net Loss from Continuing Operations (1,115,884) (1,089,589) (2,759,983) (2,626,917) (12,265,667)
Discontinued operations:
Net loss from discontinued
operations net of tax effects of $0 -- (1,871) -- (6,928) (8,138)
Loss on disposal of discontinued operations
net of tax effects of $0 -- -- -- -- (36,327)
------------ ------------ ------------ ------------ ------------
Total Loss from Discontinued Operations -- (1,871) -- (6,928) (44,465)
------------ ------------ ------------ ------------ ------------
Basic & Diluted loss per share
Continuing operations $ (0.04) $ (0.05) $ (0.11) $ (0.14)
Discontinued operations -- -- -- --
Net loss per share basic &diluted $ (0.04) $ (0.05) $ (0.11) $ (0.14)
Weighted average shares 25,058,968 20,676,812 25,058,968 19,396,531
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
4
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Unaudited)
Cumulative
Since
April 6, 2000
For the Nine Months Ended Inception of
September, Development
2005 2004 Stage
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,759,983) $ (2,633,845) $ (12,310,132)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation 15,640 14,320 41,458
Stock Issued for Expenses -- -- 114,959
Compensation for Options/Warrants -- (424,256)- 3,951,863
Cashless exercise of Warrants -- -- 147,989
Foreign Currency Translation -- (513,178)
Net Loss from Discontinues Operations -- 6,928 8,138
Loss on Disposal of Operations -- -- 36,327
Amortization of Interest Expense 233,575 -- 233,575
Change in Operating Assets and Liabilities:
(Increase) Decrease in Accounts Receivable (120,488) (80,250) (200,738)
(Increase) Decrease in Deposit on Inventory (351,382) (33,430) (493,182)
(Increase) Decrease in Prepaid Expenses -- (84,305) --
(Increase) Decrease in Value Added Tax Receivable 14,562 (16,185) (31,673)
Increase (Decrease) in Accounts Payable (164,474) (53,953) 456,262
Increase (Decrease) in Accrued Payroll Liabilities (41,087) (17,646) --
Increase (Decrease) in Unearned Revenue 193,275 -- 255,645
Increase (Decrease) in Interest Payable 193,275 -- 255,845
--------------- --------------- ---------------
Net Cash Used in continuing activities ,(2,707,977) (3,322,622) (8,030,102)
Net Cash Used in discontinued activities -- -- (1,250)
--------------- --------------- ---------------
Net Cash Used in operating activities (2,707,977) (3,322,622) (8,031,352)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash Acquired in Merger -- -- 3,834
Purchase of Plant and Machinery Equipment (15,837) (761) (23,022)
Purchase of Office Equipment (1,940) (48,763) (60,927)
Purchase of Furniture & Fixture (829) (345) (1,195)
Investment in Joint Venture 5,940 -- (994,060)
--------------- --------------- ---------------
Net cash provided by investing activities (12,666) (49,869) (1,075,370)
--------------- --------------- ---------------
5
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Unaudited)
Cumulative
since
April 6,
2000
For the Nine Months Ended Inception of
September 30, Development
2005 2004 Stage
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Sale of Common Stock 437,116 6,110,257 8,114,218
Related Party Receivable (84,285) (173,796) (145,845)
Amount Loaned on Note Receivable -- (35,007) (143,468)
Payment on Notes Receivables 142,116 -- 142,116
Proceeds from Related Party Payable 97,500 39,149 97,500
Payments on Related Party Payable
(97,500) (97,500)
Payment on Long-Term Note Payable -- (932,100) (969,407)
Proceeds from Long-Term Note Payable -- 19,895 969,407
Proceeds from Convertible Note Payable 7,911,400 -- 7,911,400
--------------- --------------- ---------------
Net Cash Provided by Financing Activities 8,406,347 5,028,398 15,878,421
--------------- --------------- ---------------
Net (Decrease) Increase in Cash $ 5,685,704 $ 1,655,907 $ 6,771,699
Foreign Exchange Effect on Cash 541 57 (2,896)
Cash at Beginning of Period 1,082,558 6,732 --
--------------- --------------- ---------------
Cash at End of Period $ 6,768,803 $ 1,662,696 $ 6,768,803
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -- $ $ 1,470
Income taxes $ -- $ -- $ 455
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On May 5, 2003, the Company acquired in a reverse acquisition of
Electronic Game Card Marketing $1,735 in cash, accounts payable of $69,646 and a
long-term note payable of $121,233, in exchange for all of the Company's
outstanding common stock.
On December 5, 2003, the Company acquired in a reverse acquisition of
Scientific Energy, Inc. $2,099 in cash, technology valued at $50,000, accounts
payable of $5,595 and a note payable to a shareholder of $1,095.
During 2004, the Company issued 114,800 shares of stock in exchange for
services.
During 2004, the Company issued 75,892 shares of stock in exchange for the
cashless exercise of warrants. In connection with this cashless exercise the
Company recorded compensation in the amount of $147,913.
During 2004, the Company issued options and warrants with an exercise
price below fair market value as a result the Company has recorded Compensation
in the amount of $3,951,863.
The accompanying notes are an integral part of these financial statements.
6
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for Electronic Game, Inc.(a
development stage company) is presented to assist in understanding the Company's
financial statements. The accounting policies conform to generally accepted
accounting principles and have been consistently applied in the preparation of
the financial statements.
Interim Reporting
The unaudited financial statements as of September 30, 2005 and for the
three and nine month period then ended reflect, in the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to
fairly state the financial position and results of operations for the three and
six months. Operating results for interim periods are not necessarily indicative
of the results which can be expected for full years.
Nature of Operations and Going Concern
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a "going concern", which assume that the
Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations.
Several conditions and events cast doubt about the Company's ability to
continue as a "going concern". The Company has incurred net losses of
approximately $12,310,132 for the period from April 6, 2000 (inception) to
September 30, 2005.
The Company's future capital requirements will depend on numerous factors
including, but not limited to, continued progress in developing its products,
market penetration and profitable operations from sale of its electronic game
cards.
These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a "going concern". While
management believes that the actions already taken or planned, will mitigate the
adverse conditions and events which raise doubt about the validity of the "going
concern" assumption used in preparing these financial statements, there can be
no assurance that these actions will be successful.
If the Company were unable to continue as a "going concern", then
substantial adjustments would be necessary to the carrying values of assets, the
reported amounts of its liabilities, the reported expenses, and the balance
sheet classifications used.
Organization and Basis of Presentation
The Company was incorporated under the laws of the United Kingdom on April
6, 2000, under the name of Electronic Game Card, Ltd. Until 2002, the Company
remained dormant and had no operations. On May 5, 2003, the Company entered into
an agreement whereby it acquired 100% of the outstanding stock of Electronic
Game Card Marketing, a Delaware Company.
On December 5, 2003, the Company acquired 100% of the outstanding stock of
the Electronic Game Card, Inc. (Nevada) in a reverse acquisition. At this time,
a new reporting entity was created and the name of the Company was changed to
Electronic Game Card, Inc.
7
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
As of September 30, 2005, the Company is in the development stage but has begun
planned principal operations.
Principals of Consolidation
The consolidated financial statements include the accounts of the
following companies:
o Electronic Game Card, Inc. ( Nevada Corporation)
o Electronic Game Card, Ltd. (United Kingdom Corporation)
o Electronic Game Card Marketing (A Delaware Corporation)
The results of subsidiaries acquired during the year are consolidated from
their effective dates of acquisition. All significant intercompany accounts and
transactions have been eliminated.
Nature of Business
The Company plans to engage in the development, marketing, sale and
distribution of recreational electronic software which primarily targeted
towards lottery and sales promotion markets through its Great Britain
subsidiary.
Concentration of Credit Risk
The Company has no significant off-balance-sheet concentrations of credit
risk such as foreign exchange contracts, options contracts or other foreign
hedging arrangements.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
Depreciation
Fixed assets are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets as follows:
Asset Rate
----------------------------- -------
Plant and Machinery Equipment 3 years
Office Equipment 3 years
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the property and related
8
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
accumulated depreciation accounts, and any resulting gain or loss is credited or
charged to income
Depreciation Expense for the nine months ending September 30, 2005 and
2004 were $15,640 and $14,320.
Advertising Costs
Advertising costs are expensed as incurred. For the nine months ended June
30, 2005 and 2004, advertising costs were $284,610 and $621,853, respectively.
Revenue recognition
Revenue is recognized from sales of product at the time of shipment to
customers.
Foreign Currency Translation
The Company's functional currency is the U.S. Dollar and the reporting
currency is the U.S. Dollar. All elements of financial statements are translated
using a current exchange rate. For assets and liabilities, the exchange rate at
the balance sheet date is used. Stockholders' Equity is translated using the
historical rate. For revenues, expenses, gains and losses the weighted average
exchange rate for the period is used. Translation gains and losses are included
as a separate component of stockholders' equity. Gain and losses resulting from
foreign currency transactions are included in net income.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loss per Share
Basic loss per share has been computed by dividing the loss for the year
applicable to the common stockholders by the weighted average number of common
shares outstanding during the years. As of September 30, 2005, the Company had
12,769,553 option and warrants outstanding to purchase up to 12,760,553 shares
of common stock. However, the effect of the Company's common stock equivalents
would be anti-dilutive for September 30, 2005 and 2004 and are thus not
considered.
Income Taxes
9
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
The Company is subject to income taxes in the United States of America, United
Kingdom and the state of New York. As of December 31, 2004, the Company had a
net operating loss carryforward for income tax reporting purposes of
approximately $6,308,687 in the United States ans $3,503,438 in the United
Kingdom that may be offset against future taxable income through2023. Current
tax laws limit the amount of loss available to be offset against future taxable
income when a substantial change in ownership occurs. Therefore, the amount
available to offset future taxable income may be limited. No tax benefit ha been
reported in the financial statements because the Company believes that there is
a 50% or greater chance the carry forwards are offset by a valuation allowance
of the same amount
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Taxes." SFAS No.109 requires recognition of deferred income tax assets and
liabilities for the expected future income tax consequences, based on enacted
tax laws, of temporary differences between the financial reporting and tax bases
of assets and liabilities.
Stock Compensation for Non-Employees
The Company accounts for the fair value of its stock compensation grants
for non-employees in accordance with FASB Statement 123. The fair value of each
grant is equal to the market price of the Company's stock on the date of grant
if an active market exists or at a value determined in an arms length
negotiation between the Company and the non-employee.
NOTE 2 - INCOME TAXES
The Company is subject to income taxes in the United States of America,
United Kingdom, and the state of New York. As of December 31, 2004, the Company
had a net operating loss carryforward for income tax reporting purposes of
approximately $6,308,687 in the United States and $3,503,438 in the United
Kingdom that may be offset against future taxable income through 2023. Current
tax laws limit the amount of loss available to be offset against future taxable
income when a substantial change in ownership occurs. Therefore, the amount
available to offset future taxable income may be limited. No tax benefit has
been reported in the financial statements, because the Company believes there is
a 50% or greater chance the carry-forwards will expire unused. Accordingly, the
potential tax benefits of the loss carry-forwards are offset by a valuation
allowance of the same amount.
For the years ending December 31, 2004 and 2003 income tax expense was $0
and $455.
NOTE 3 - DEVELOPMENT STAGE COMPANY
The Company has not begun principal operations and as is common with a
development stage company, the Company has had recurring losses during its
development stage. The Company's financial statements are prepared using
generally accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. However, as of September 30, 2005, the Company did
not have significant cash or other material assets, nor did it have an
established source of revenues sufficient to cover its operating costs and to
allow it to continue as a going concern.
10
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 4 - NOTES RECEIVABLE
As of September 30, 2005 and December 31, 2004, the following amounts were
owed to the Company:
September 30, December 31,
2005 2004
-------- ------------
Note Receivable, no interest, due upon demand
Interest imputed using the 12 month average of
1 month libor rate of 1.544 $ 1,352 $143,468
-------- --------
Total Note Receivable $ 1,352 $143,468
======== ========
NOTE 5 - RELATED PARTY TRANSACTIONS
During the six months ended September 30, 2005 and the year ended December
31, 2004, the Company has certain related party receivables due on demand and
are non-interest bearing. In previous years, the Company and its subsidiaries
had borrowed from the same companies in excess of $1 million with little or no
interest. As of September 30, 2005 and December 31, 2004, $145,845 and $61,560,
is still owed to the Company.
During the six months ended September 30, 2005 and the year ended December
31, 2004, the Company has certain related party payables due on demand and are
non-interest bearing. In previous years, the Company and its subsidiaries had
borrowed from the same companies in excess of $1 million with little or no
interest. As of September 30, 2005 and December 31, 2004, $97,500 and $0, no
liability remains.
NOTE 6- COMMON STOCK TRANSACTIONS
On August 2, 2002, the Company issued 99 shares at 1.00 British Pound or
the equivalent of $1.60, these shares were later forward split to 12,696,595
shares in connection with the acquisition of Scientific Energy and it was
recorded by $12,539 credit to common stock of and a debit to retained earnings
of $12,539. All references to stock reflect the stock split.
On December 5, 2003, an additional 1,126,467 shares were issued to the
previous owners of Scientific Energy, Inc. and for the conversion of a note
payable of $31,344.
On February 20, 2004, the Company issued 6,853,750 common shares and
3,426,875 warrants for $1.00 per share.
On October 12, 2004 the Company entered into a subscription agreement with
Scientific Games internantional, Inc. to purchase Two Million One Hundred
Seventy-One Thousand Five Hundred Ninety-Four (2,171,594) shares of newly-issued
common stock, par value $0.001 per share of the Company for an aggregate
purchase price of $1,085,797.50.
During 2004 the Company issued 419,558 shares of common stock from
warrants in exchange for $343,666 in cash.
11
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 6- COMMON STOCK TRANSACTIONS (Continued)
During 2004 the Company issued 380,164 shares of common stock from the execution
of options in exchange for $463,974 in cash.
During 2004 the Company issued 1,174,000 shares of common stock for
private placement fundraising services.
During 2004 the Company issued 114,880 shares of common stock in exchange
for services.
From January 2005 through March 2005 the Company issued 134,934 shares of
common stock from warrants in exchange for $115,833 in cash.
From April 2005 through June5 the Company issued 240,795 shares of common
stock from warrants in exchange for $170,000 in cash.
June 30 to September 30 the Company issued 12,500 shares of common stock
for warrants in exchange for $12,500 in cash.
NOTE 7 - STOCK OPTIONS /WARRANTS
The Company has adopted a stock compensation plan entitled the 2002 Equity
Compensation Plan. Pursuant to this 2002 Equity Compensation Plan, grants of
shares can be made to(i) designated employees of Electronic Game Card Inc. (the
"Company") and its subsidiaries including Electronic Game Card Ltd, (ii) certain
advisors who perform services for the Company or its subsidiaries and (iii)
non-employee members of the Board of Directors of the Company (the "Board") with
the opportunity to receive grants of incentive stock options, nonqualified
options, share appreciation rights, restricted shares, dividend equivalent
rights and cash awards. The Company believes that the Plan will encourage the
participants to contribute materially to the growth of the Company, thereby
benefiting the Company's shareholders, and will align the economic interests of
the participants with those of the shareholders.
The 2002 Equity Compensation Plan provides for options equivalent up to
10% of the issued share capital of the company to be offered. The original
exercise price of the options was equal to one half the price at which the
Common Stock is issued at the first public offering, however, subsequent to the
adoption of the 2002 Equity Compensation Plan the board determined that the
exercise price would be issued from a range of $0.50 to $2.00 per option. Those
eligible to participate in this plan are entitled to vest 25% of the stock
offered in this option for each six months of service with the Company. After
vesting the exercise of these options must be done within ten years of the
option date. As of December 31, 2004, 1,190,000 of a total possible of 1,200,000
options have been distributed. No further stock option plans have been
instituted. During 2004 the Company recorded $110,700 in compensation expense in
connection with options granted pursuant to this plan.In connection with a
private placement on February 20, 2004, the Company issued 3,426,875 warrants.
Each warrant is exercisable for a period of five years at a price of $1.00 for
one share of common stock. The warrants were determined to have no value at the
time of their issuance.
In addition, on February 20, 2004, the Company issued additional
warrants as consideration for assistance in placing the common stock pursuant to
the private placement. The warrants were issued as follows: 1) Warrants to
purchase up to 353,750 shares of common stock at an exercise price of $1.00 per
share were granted to Middlebury Capital LLC. These were granted as compensation
for placement agents for the private placement. These are exercisable through
February 20, 2009. 2) Warrants to purchase up to 32,000 shares of common stock
at an exercise price of $1.00 per share were granted to National Securities,
Inc. These were granted as compensation for placement agents for the common
stock. These are exercisable through February 20, 2009. 3) Warrants to purchase
up to 200,000
12
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 7 - STOCK OPTIONS /WARRANTS (Continued)
shares of common stock at an exercise price of $1.00 per share were granted to
First Securities USA, Inc. These were granted as compensation for placement
agents for the common stock. These are exercisable through February 20, 2009. 4)
Warrants to purchase up to 86,250 shares of common stock at an exercise price of
$1.00 per share were granted to IQ Ventures. These were granted as compensation
for placement agents for the common stock. These are exercisable through
February 20, 2009.
The company has agreed that warrant holders could elect to convert their
warrants by a cashless exercise. This provision permits the warrant holder to
cancel sufficient warrants at the then current share price to receive the
balance of the warrants in Common Stock without payment to the company. In 2004
the Company has recorded $3,961,072 in compensation expense in connection with
the granting and cashless provision of the warrants detailed above.
NOTE 8 - DISCONTINUED OPERATIONS
On December 5, 2003, the Company entered into an agreement with Scientific
Energy, Inc. (Utah), that upon completion, 100% (20,000,000 shares) of the
Scientific Energy's shares would be returned, and the Company would cease to be
a wholly owned subsidiary of Electronic Game Card, Inc. On November 30, 2004,
the Company completed the disposal of the discontinued operations. The assets
and liabilities of Scientific Energy, Inc. (Utah) to be disposed of consisted of
the following:
November 30,
2004
-------
Cash $ 40
Intangibles 50,000
-------
Total Assets 50,040
-------
Accounts Payable 11,978
Income Tax Payable 100
Shareholder Loan 1,635
-------
Total Liabilities 13,713
-------
Net Assets to be Disposed of $36,327
=======
Operating results of this discontinued operation for the three and six
months ended June 30, 2004 are shown separately in the accompanying consolidated
statement of operations. The operating results of the discontinued operations
for the three six months ended June 30, 2004 consist of:
3 months 6 months
General and Administrative Expenses $ 194 $ 4,492
Interest Expense 554 565
------- -------
Net Loss $ (748) $(5,057)
======= =======
13
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 9 - SETTLEMENT OF LITIGATION INCOME
Electronic Game Card, Ltd. was a party to a lawsuit brought in the Central
London County Court by a former consultant. The claim was for arrears of
remuneration totaling $49,117 (27,625UK), remuneration for six months' notice
period of $57,341 (32,250UK) to be assessed in relation to the Senior Executive
Bonus Scheme, interest, costs and "further or other relief" arising from EGC's
alleged breaches of a written agreement. In conjunction, EGC filed a
counterclaim which seeks damages in excess of $26,670 but limited to $88,900 and
interest. The claims were settled on the basis of a Consent Order dated November
13, 2004.
As a result of the Consent Order the Company provided payment in the
amount of $51,734 (27,000UK). In the accompanying Consolidated Statement of
Operations income from settlement of litigation has been recognized in the
amount of $42,154, which is the accruals that were previously booked less the
final judgement.
NOTE 10 - COMMITMENTS
On September 1, 2004, the Company entered into a lease agreement with a
related party for office space in London on a one year lease agreement. The
terms for the agreement required a monthly rent of $5,748 (3,000UK). The total
minimum lease payments for the year ended December 31, 2005 is $45,984.
NOTE 11 - JOINT VENTURE
On October 12, 2004, the Company entered into a joint venture agreement
with Scientific Games International, Inc. ("SciGames:), to exclusively market
and promote the Company's Electronic Game Card product worldwide to national and
state lotteries. SciGames purchased Two Million One Hundred Seventy-One Thousand
Five Hundred Ninety-Four (2,171,594) shares of newly-issued common stock, par
value $0.001 per share of the Company for an aggregate purchase price of
$1,085,797.50 pursuant to a subscription agreement dated October 12, 2004. At
the closing, the Company contributed One Million Dollars ($1,000,000) to the
joint venture. The closing was completed on November 12, 2004 when the funds
cleared into the joint venture's account. As of June 30, 2005 and December 31,
2004, the investment in the joint venture was $994,060 and $1,000,000
respectively.
NOTE 12 - CONVERTIBLE PROMISSORY NOTE
On March 24, and April 6th, 2005 the Registrant sold a total of $8,418,000
Convertible Promissory Notes to accredited investors in a private placement of
securities. This note is payable upon written demand which may be made on or
after March 31, 2007, unless this note has been converted into shares of the
Company's "Series A Preferred Stock" or "Common Stock". The Interest rate of
this note is 6%. In connection with the convertible debt issuance on March 24,
2005 the company incurred charges in the amount of $718,800. These costs are
being amortized over the two year life on the note and as of March 31, 2005
amortization amount that has been booked to interest expense is $74,875.
Each $48,000 principal amount of a Convertible Promissory Note will
automatically convert into 32,000 shares of the Registrant's Series A
Convertible Preferred Stock, par value $0.001 per share (the "Series A Preferred
Stock"), upon the effectiveness of actions by the Registrant's shareholders to
authorize the Series A Preferred Stock. Each share of the Series A Preferred
Stock is initially convertible into one (1) share of the Registrant's common
stock,
14
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Continued)
(Unaudited)
NOTE 12 - CONVERTIBLE PROMISSORY NOTE (Continued)
par value $0.001 per share (the "Common Stock"), which equates to an initial
conversion price of $1.50 per share of Common Stock. The Convertible Promissory
Notes may be converted, at the purchaser's discretion, directly into Common
Stock on an as-converted-into-Series-A-Preferred-Stock basis, whether or not the
Series A Preferred Stock is authorized and issued, and are immediately
convertible for such purpose. Consequently, each Convertible Promissory Note is
convertible ultimately into an aggregate of 32,000 shares of Common Stock. Also,
the Registrant issued one (1) warrant (a "Warrant") to acquire one (1) share of
Series A Preferred Stock for every two shares of Series A Preferred into which
the Convertible Promissory Notes are initially convertible. The Warrants shall
be exercisable to acquire shares of Series A Preferred Stock upon the
effectiveness of actions by the Registrant's shareholders to authorize the
Series A Preferred Stock. The Warrants shall be exercisable initially at $1.85
per share of Series A Preferred Stock, subject to adjustment, and shall be
exercisable for a period of 5 years. In addition, at the option of the holder,
each Warrant is also immediately exercisable directly to acquire, instead of
shares of Series A Preferred Stock, shares of Common Stock on an
as-converted-from-Series-A-Preferred-Stock basis, whether or not the Series A
Preferred Stock is ever authorized or issued. Unexercised Warrants shall expire
earlier upon notice by the Company to the holders of the Warrants following any
consecutive 30-day trading period during which the Common Stock trades on its
principal market at a price at or above three (3) times the then applicable
exercise price with average daily volume of at least 100,000 shares (subject to
adjustment of such trading volume threshold in the event of stock splits,
reverse stock splits, stock dividends, recapitalizations or similar events).
ELECTRONIC GAME CARD, INC.
(A Development Stage Company)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-QSB.
GENERAL
Electronic Game Card, Inc., is a supplier of innovative games to the lottery,
casino, and promotional industry worldwide. Our lead product is the EGC
GameCard, a unique credit card-sized pocket game combining interactive
capability with "instant win" excitement. We have had revenues of $225,187 from
sales of the GameCard to one State lottery. The company has made losses in the
development stage since April 6, 2000 of $11,194,248.
THE COMPANY
Electronic Game Card, Inc. (referred to as "EGC", "us", "we" or "Company") is a
supplier of innovative games to the lottery and promotional industry worldwide.
Our lead product is the EGC GameCard, a proprietary credit card-sized pocket
game combining interactive capability with "instant win" excitement.
The EGC GameCard was designed by us to be rich in functionality, customizable,
portable, and cost efficient. Each EGC GameCard is equipped with a
microprocessor, random number generator, LCD, and power source, and security
features protecting both the consumer and the promoter. The EGC GameCard weighs
in at just less than one half an ounce and is approx. 3mm thick. We have three
distinct markets for our GameCard product: the Lotteries; Casinos, and the Sales
Promotions.
15
LOTTERY MARKET
Lottery operators currently make use of paper scratch cards to give players an
"instant" win or lose reward experience. Over the last several years ways to
increase the price point of lottery tickets have been sought by some promoters.
Consumers can currently pay as much as $20.00 per scratch card although the norm
is between $2-$5. The EGC GameCard is a digital evolution of the scratch card,
offering multiple plays and multiple chances to win in a credit card-sized
medium that is acceptable to enterprising US state Lottery operators. Currently
sales of gamecards are taking place throughout Iowa.following successful trials
earlier in the year. Sales to US lotteries have taken longer to achieve than
expected by the management of the Company's Joint Venture with Scientific Games
International. The principal reason for delay in ordering from interested States
appears to be the due process that needs be undertaken by each individual State
to allow the sale of EGC GameCards to the public. For instance the GameCard need
be classified as not offending State laws or as being a slot machine, and the
price increase envisaged needs also be approved, and can meet resistance from
lobby groups. Security matters also need close examination. These issues often
requiring changes in the law need be considered by each State and additionally
individual States carry out focus trials on the Gamecard. Nevertheless the
Company has no reason to believe that the initial interest in the GameCard
product has diminished as active dialogues are continuing with a number of of
States in a satisfactory manner.
SALES PROMOTION MARKET
Much of the sales promotion market consists of "giveaway" items by corporations
for use in loyalty programs, incentive programs, advertising, promotions,
marketing, competitions and the like, for example a pen or squeeze ball. Another
major area is the prize and competition sector of sales promotions where the
consumer is given free entry to enter prize competitions. The EGC GameCard seeks
to combine these two attractions. Newspapers, magazines and direct mail
solicitations offer rewards, frequently using scratchcards, coupons and other
forms of entry to engage consumers in promotional competitions. While our EGC
GameCard can be applied to a broad range of potential promotional opportunities,
we have focused our efforts initially on sales promotions and direct mail
solicitations. This market has proved disappointing to date for the Company
despite very strong interest shown initially by brands and advertising agencies
and trials showing consumer response rates being ten times or more greater than
scratchcard offerings. The principal problems have been the time taken to fulfil
orders of customized games and a fear of marketeers in being first to market
with with an unproven market product requiring minimum order values of over
$100,000. The Company put into being a policy earlier in the year to supply a
small range of generic games in much smaller quantities with far faster delivery
times. These games which have needed to be developed and tested over the past
few months are now ready to be promoted with particular emphasis on casino
promotions where substantial interest has been received. A trial with a major TV
channel provider is currently in progress.
INDIAN GAMING MARKET
The company received a legal Opinion from the National Indian Gaming Commission
(NIGC) in the summer of 2005 which classified the EGC GameCard product under
Class II regulations which decision effectively remove any objection to the sale
to GameCards to consumers on Tribal lands.
As a result of this opinion EGC consider there is no barrier to immediately
commencing sales of EGC GameCards to Indian Casino operators. The Indian gaming
market spend on Tribal lands is now in excess of $19 billion a year and,
although it is too early to anticipate the level of sales, the management of the
Company believes this market has potential equal to the lottery market in terms
of profitability. The Company has developed specific games for this market place
in the form of pocket slots and video poker .This market applies primarily to
the sale of GameCards as gaming devices directly to the public in casinos and
reservations owned and operated by Indian Tribes, although sales of GameCards
may also be made as sales promotion devices.
16
BUSINESS STRATEGY
The Company is currently marketing the EGC GameCard to lottery promoters in the
US through its joint venture with Scientific Games International, Inc.. A
further opportunity has now opened to the company following approval of our
product for sale to consumers on Tribal Lands by the NIGC.(see above) which
opens up a substantial market place.
The XOGO multi-play GameCard is supported by the EGC Sales Marketing and Games
Design teams in the US and in Europe. Previously they had worked with brands or
agencies to customize XOGO GameCard applications to each brand's individual
goals but this has proved a costly and time consuming business. A revision of
this previous strategy was put in place earlier this year to develop generic
games which do not require specific customization and consequently avoid lengthy
software processes. This will allow for the sale of EGC product in smaller
quantities and at greatly improved delivery times, the lack of which the Company
believes was a previous impediment to sales.
In addition to our current and planned sales team, we are also working closely
with strategic partners to distribute our products globally. We typically enter
into exclusive contracts with strategic partners for a specific market and
geography and several such negotiations have been completed recently in
Portugal, India, Indonesia and Thailand.
The games and gaming market is currently one of the fastest growing areas of
public interest in the world today. by virtue of the greater capability of the
medium of personal computers (PC's) , and now forthcoming on mobile phones. For
example the success of American Idol being due to the realization of the
interactive use of SMS texting. The spectacular global growth of peer to peer
(P2P) poker games online on the Internet in the past two years also being an
example. Not only has this interest recently opened up opportunity for sales of
the Company's GameCard for promotional use but it opens other digital avenues in
which the Company's game design skills may be used to similar advantage in prize
and competition games.for consumers, which can both complement sales of
Gamecards.and potentially offer other avenues.for sales of reward based games.
The Company has been examining such opportunities in this growth market and
intends shortly to announce a new complementary strategy for reward based games.
RESULTS OF OPERATIONS
The company has recorded $96,255 of revenues this quarter and revenues for the
year to date of $232,875. Sales and Marketing costs were $134,565 compared with
$270,159 in the comparable period for 2004 and $284,610 year to date compared
with $621,893 for the same period in 2004. This reflects the concentration on
lottery sales development via the joint venture agreement with Scientific Games.
General and Administration expenses were $139,746 compared with $284,092 and
$786,528 and $525,207 for year to date compared with for the same period in
2004. This expense was lower than the comparable period as we make certain
economies in the period. Consultancy costs were higher at $390,236 compared with
$367,815 but significantly lower year to date $690,918 compared with the
previous year $938,827 Salaries and payroll costs were $222,661 compared with
$166,722 due to additional technical staff employed but were lower for the
comparable nine month period $592,067 compared with $629,260.in 2004. Operating
loss reduced $868,578 compared with $1,088,788 for the quarter and
$2,312,921,for the year to date compared with $2,634,937 in 2004.
FINANCIAL RESOURCES
Through April 6, 2005 the company sold $8,666,000 gross, $7,911,200 net, of its
convertible promissory notes (the "Convertible Promissory Notes") to accredited
investors in a private placement of securities (the "Private Placement"). Each
$48,000 principal amount of a Convertible Promissory Note will automatically
convert into 32,000 shares of the Registrant's Series A Convertible Preferred
Stock, par value $0.001 per share (the "Series A Preferred Stock"). Each share
of the Series A Preferred Stock is initially convertible into one (1) share of
the Registrant's common stock, par value $0.001 per share (the "Common Stock"),
which equates to an initial conversion price of $1.50 per share of Common Stock.
Also, the Company issued one (1) warrant (a "Warrant") to acquire one (1) share
of Series A Preferred Stock for every two shares of Series A Preferred into
which the Convertible Promissory Notes are initially convertible. The Warrants
shall be exercisable to acquire shares of Series A Preferred Stock upon the
effectiveness of actions by the Registrant's shareholders to authorize the
Series A Preferred Stock. The Warrants shall be exercisable initially at $1.85
per share of Series A Preferred Stock, subject to adjustment, and shall be
exercisable for a period of 5 years.
17
SUBSEQUENT EVENTS
The orders placed by the Iowa and Kansas lotteries for the month of November
have not been fulfilled due to an error rate in the GameCard units that was
considered by the Company's joint venture partners Scientific Games, in
consultation with the Iowa and Kansas lotteries, to be above that necessary for
the success of each promotion. The Company believes the level of error rates are
below the low percentage rate which it is contracted to Scientific Games to
deliver but has accepted that it is necessary for the success of the gamecards
that there should be improvements in the quality control of future deliveries.
Scientific Games and the Company are working together to effect these
improvements in production and are pleased to state that both Iowa and Kansas
lotteries wish to receive new gamecards from the Company as soon as practicable.
The Company believes that the methods of production can be readily improved to
obtain the quality already experienced in other earlier successful deliveries to
Scientific Games and their customers and that the errors experienced should not
re-occur disadvantageously to the Company.
The results from the G2E Gaming Show launch in the Fall of the Company's Tribal
Numbers GameCard products aimed at Indian casino promoters have achieved
substantial interest and the Company is currently in negotiations with
Scientific Games regarding a joint venture in this new market place.
ITEM 3. CONTROLS AND PROCEDURES
The issuer's principal executive officer or officers and principal financial
officer or officers, or persons performing similar functions, are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f))
for the issuer and have: designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under their
supervision, to ensure that material information relating to the issuer,
including its consolidated subsidiaries, is made known to them by others within
those entities, particularly during the period in which the periodic reports are
being prepared; designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under their
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; evaluated
the effectiveness of the issuer's disclosure controls and procedures as of the
end of the fiscal quarter (the "Evaluation Date").
Based on their evaluation as of the Evaluation Date, their conclusions about the
effectiveness of the disclosure controls and procedures were that nothing
indicated: any significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record, process,
summarize and report financial data; any fraud, whether or not material, that
involves management or other employees who have a significant role in the
issuer's internal controls; or any material weaknesses in internal controls that
have been or should be identified for the issuer's auditors and disclosed to the
issuer's auditors and the audit committee of the board of directors (or persons
fulfilling the equivalent function).
18
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
There was no significant change in the issuer's internal control over financial
reporting that occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the issuer's
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
On April 6, 2005, the Registrant completed a second and final closing of its
offering of convertible promissory notes (the "Convertible Promissory Notes") to
accredited investors in a private placement of securities (the "Private
Placement") previously reported on the Registrant's Current Report on Form 8-K
filed on March 31, 2005 (the "March 31, 2005 8-K"). The Registrant sold an
additional $248,000 Convertible Promissory Notes in the final closing on April
6, 2005, making a total of $8,666,000 Convertible Promissory Notes sold, in the
aggregate, in the Private Placement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included as part of this report:
19
Exhibit
Number Title of Document
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
ELECTRONIC GAME CARD
Date: November 14 , 2005 By: /s/ John Bentley
--------------------------------
Chief Executive Officer
(Principal Executive Officer)
Date: November 14 , 2005 By: /s/ Linden Boyne
--------------------------------
Linden Boyne
Secretary / Treasurer
(Principal Financial Officer)
20