UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Quarter ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-49723
IGAMES ENTERTAINMENT, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Nevada 88-0501468
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 SOUTH HENDERSON ROAD, SUITE 325, KING OF PRUSSIA, PA 19406
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(Address of Principal Executive Offices)
(610) 354-8888
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(Issuer's Telephone Number, Including Area Code)
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
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As of August 12, 2004, the issuer had issued and outstanding 5,524,394
shares of its common stock, par value $0.004 per share.
IGAMES ENTERTAINMENT, INC.
QUARTERLY PERIOD ENDED JUNE 30, 2004
INDEX TO FORM 10-QSB
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ...................................... 1
Consolidated Balance Sheet at June 30, 2004 (unaudited)
Consolidated Statements of Operations for the Three
Months Ended June 30, 2004 and 2003 (unaudited) ........... 2
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2004 and 2003 (unaudited) ........... 3
Notes to Financial Statements ............................. 4
Item 2. Management's Discussion and Analysis or Plan or Operation . 11
Item 3. Controls and Procedures ................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 21
Item 2. Changes in Securities and Use of Proceeds ................. 22
Item 3. Defaults Upon Senior Securities ........................... 22
Item 4. Submission of Matters to a Vote of Security Holders ....... 22
Item 5. Other Events .............................................. 22
Item 6. Exhibits and Reports on Form 8-K .......................... 22
Signatures ......................................................... 24
IGAMES ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
ASSETS
Current assets:
Cash ......................................................... $ 395,033
Restricted cash .............................................. 2,002,376
Accounts receivable .......................................... 1,185,208
Loans receivable ............................................. 63,000
Prepaid expenses and other current assets .................... 264,978
------------
Total current assets ...................................... 3,910,595
Property and equipment, net ..................................... 395,917
Intangible assets, net .......................................... 5,506,639
Deferred financing costs ........................................ 119,586
------------
$ 9,932,737
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 1,530,923
Accrued expenses ............................................. 154,390
Current portion of capital lease ............................. 17,794
Loans payable ................................................ 2,000,000
Notes payable ................................................ 160,000
Lines of credit .............................................. 5,260,710
Due to officer ............................................... 335,785
Commissions payable .......................................... 332,564
Dividends payable ............................................ 23,875
------------
Total current liabilities ................................. 9,816,041
Long-term liabilities:
Capital lease ................................................... 37,140
Stockholders' Equity:
Preferred stock; $.001 par value, 5,000,000 shares authorized
1,351,640 shares issued and outstanding ................... 1,351
Common stock; $.004 par value, 50,000,000 shares authorized
5,524,394 shares issued and outstanding ................... 22,097
Additional paid-in capital ................................... 10,904,344
Accumulated deficit .......................................... (10,848,236)
------------
Total stockholders' equity ................................ 79,556
------------
$ 9,932,737
============
The accompanying notes are an integral part of
these unaudited financial statements.
1
IGAMES ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-------------------------
2004 2003
----------- -----------
Revenues ........................................... $ 4,614,557 $ 1,327,088
Operating expenses ................................. 3,455,553 963,159
----------- -----------
Gross Profit ....................................... 1,159,004 363,929
Selling, general and administrative expenses ....... 806,232 266,957
----------- -----------
Operating profit ................................... 352,772 96,972
Other income (expenses):
Depreciation and amortization ...................... (324,433) (35,726)
Interest expense, net .............................. (652,351) (23,548)
Other income ....................................... 170 -
----------- -----------
(976,614) (59,274)
----------- -----------
Net income (loss) .................................. $ (623,842) $ 37,698
=========== ===========
Net income (loss) per common share basic and diluted $ (0.12) $ 0.01
=========== ===========
Weighted Average Common Shares Outstanding
-Basic and Diluted ........................... 5,156,746 4,042,850
=========== ===========
The accompanying notes are an integral part of
these unaudited financial statements.
2
IGAMES ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
-------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income (loss) ................................ $ (623,842) $ 37,698
Adjustments used to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization ................. 324,433 35,726
(Increase) decrease in:
Prepaid expenses and other current assets .. (73,102) (5,426)
Accounts receivable ........................ (290,990) (17,715)
Increase (decrease) in:
Accounts payable ........................... 874,623 100,386
Accrued expenses ........................... 41,340 9,631
Commissions payable ........................ 294 214,806
----------- -----------
Net cash provided by operating activities .......... 252,756 375,106
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment .............. (9,962) (183,612)
Purchase of intangible assets .................... - (9,803)
Purchase of deferred financing ................... - (52,162)
----------- -----------
Net cash used in investing activities .............. (9,962) (245,577)
----------- -----------
Cash flows from financing activities:
Increase in restricted cash ...................... (1,059,135) (1,699,899)
Net change in line of credit ..................... 2,822,674 1,445,001
Capital lease obligation ......................... - 148,437
Payments on capital lease obligations ............ (5,446) (74,218)
Distributions payable to owners .................. 23,875 -
Advances from officer ............................ (3,247) 100,000
Decrease in notes payable ........................ (1,858,500) -
Dividends ........................................ - (22,500)
----------- -----------
Net cash used by financing activities .............. (79,779) (103,179)
----------- -----------
NET INCREASE IN CASH ............................... 163,015 26,350
CASH, beginning of period .......................... 232,018 1,363,450
----------- -----------
CASH, end of period ................................ $ 395,033 $ 1,389,800
=========== ===========
Supplemental disclosures:
Cash paid during the period for interest ......... $ 652,351 $ 23,548
=========== ===========
Taxes ............................................ $ - $ -
=========== ===========
The accompanying notes are an integral part of
these unaudited financial statements.
3
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
iGames Entertainment, Inc. (the "Company" or "iGames") was originally
incorporated in the State of Florida on May 9, 2001 under the name Alladin
Software, Inc. On June 25, 2001, the Company changed its name to iGames
Entertainment, Inc. On July 10, 2001, iGames Entertainment, Inc. was
incorporated in Nevada, and iGames Entertainment, Inc., a Florida corporation,
became a wholly-owned subsidiary.
On January 2, 2004, pursuant to an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") by and among Money Centers of America, Inc.
(Money Centers), Christopher M. Wolfington, iGames, Michele Friedman, Jeremy
Stein and Money Centers Acquisition, Inc., a wholly-owned subsidiary of iGames,
Money Centers Acquisition, Inc. was merged with and into Money Centers and Money
Centers, as the surviving corporation, became a wholly-owned subsidiary of
iGames (the "Merger"). For accounting purposes, the transaction was treated as a
recapitalization and accounted for as a reverse acquisition. Therefore, the
financial statements reported herein and accompanying notes thereto reflect the
assets, liabilities and operations of Money Centers as if it had been the
reporting entity since inception. In connection with the Merger, all of the
issued and outstanding shares of capital stock of Money Centers were tendered to
iGames and iGames issued to the Money Centers stockholders an aggregate of
1,351,640 shares of iGames Series A Convertible Preferred Stock, $.001 par value
per share, and warrants to purchase an aggregate of 2,500,000 shares of iGames
common stock, par value $.004 per share, at an exercise price of $.01 per share.
Each share of Series A Convertible Preferred Stock is entitled to ten votes in
all matters submitted to a vote of iGames shareholders and is convertible at the
option of the holders into ten shares of common stock at any time after the date
on which iGames amends its articles of incorporation to increase the number of
authorized shares of its common stock to at least 125,000,000.
The holders of our Series A Preferred Stock have redemption rights that, if
exercised, would require us to redeem our issued and outstanding shares of
Series A Preferred Stock and 2,500,000 issued and outstanding stock purchase
warrants in exchange for the issued and outstanding common stock of Money
Centers of America, Inc.
Money Centers is a single source provider of cash access services to the gaming
industry. Money Centers has combined state-of-the-art technology with
personalized customer services to deliver the best in ATM, Credit Card Advance,
POS Debit, Check Cashing Services, CreditPlus outsourced marker services, and
merchant card processing. The Company believes that the acquisition of Money
Centers will meet the growing trend towards single source providers of products
and services to casinos and other gaming facilities worldwide. This trend
supports our business plan to identify fragmented segments of the market to
capitalize on merger and acquisition targets of synergistic companies that
support our business model. The combined companies will gain wider exposure
within the casino and gaming industry.
Pursuant to the terms of a Stock Purchase Agreement between iGames, Helene Regen
and Samuel Freshman dated January 6, 2004 (the "Stock Purchase Agreement"),
iGames acquired all of the issued and outstanding shares of capital stock of
Available Money, a provider of cash access services based in Los Angeles,
California. The purchase price of this transaction was $6,000,000, $2,000,000 of
which was paid in cash at closing, $1,850,000 of which was paid in cash on April
12, 2004, and $2,000,000 of which was paid by issuance of 1,470,590 shares of
iGames common stock on April 12, 2004.
4
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION (CONTINUED)
The Stock Purchase Agreement provides for adjustment of the purchase price in
the event that certain of Available Money's customer contracts do not renew or
that the former stockholders of Available Money do not provide iGames with
assistance in obtaining renewals of such contracts. We are withholding payment
of the remaining $150,000 of the purchase price in accordance with these
provisions of the Stock Purchase Agreement.
The primary assets acquired as a result of this transaction are Available
Money's contracts to provide automatic teller machines to 18 customers, 15 of
which are traditional casino operations. The former stockholders of Available
Money retained the right to receive all payments subsequent to the closing date
that relate to services provided by Available Money through December 31, 2003
and are jointly and severally liable for all costs and expenses incurred by
Available Money relating to services rendered on or before December 31, 2003.
2. UNAUDITED INTERIM INFORMATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction with
the financial statements and related footnotes for the fiscal year ended March
31, 2004 and notes thereto contained in the annual report on Form 10-KSB as
filed with the Securities and Exchange Commission. The results of operations for
the three months ended June 30, 2004 are not necessarily indicative of the
results for the full fiscal year ending March 31, 2005.
3. NOTES AND LOANS PAYABLE
Notes and loans payable at June 30, 2004 consisted of the following:
2004
----------
On March 1, 2002, the Company issued a convertible promissory note
to an individual in the principal amount of $100,000. From July
2003 through June 2004, the Company repaid $90,000 of this debt.
The remaining principal balance of this note of $10,000 continues
to bear interest at 10% per annum and is due upon demand. ............ $10,000
The Company borrowed $2,000,000 from Chex Services, Inc. to pay the
first $2,000,000 to the former owners of Available Money. The loan
is non-interest bearing and currently in litigation, see note 10. .... 2,000,000
This represents the remaining $150,000 of the Available Money
Purchase Price. As stated in Note 1 this amount is being withheld from
Helene Reagan and Samuel Freshman in accordance to the agreements
provisions with regard to the extensions of various contracts. ....... 150,000
----------
$2,160,000
==========
5
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LINES OF CREDIT:
On April 12, 2004 we entered into a term note in the principal amount of
$2,050,000 payable to Mercantile Capital. The note with Mercantile bears
interest at 17% and is payable over a 24 month period.
5. STOCKHOLDERS' DEFICIT
We incurred $6,000,000 of debt associated with our acquisition of Available
Money. $2,000,000 of this indebtedness was paid by tender of an aggregate of
1,470,590 shares of our common stock to the previous shareholders of Available
Money. The terms of the Stock Purchase Agreement allow for certain purchase
price adjustments associated with this indebtedness that may lower the actual
amount we are required to pay. The actual amount paid will not be determined
until certain events outlined in the Stock Purchase Agreement have materialized.
As of the date of this report, we have withheld $150,000 of the purchase price
set forth in the Stock Purchase Agreement due to non-renewal of certain
Available Money contracts and claims against Available Money for reimbursement
of expenses that they are obligated to pay pursuant to the Stock Purchase
Agreement. We have been informed that one of Available Money's casino customers
intends to terminate its contract with Available Money prior to the conclusion
of the term of the contract. We are confident this termination is outside the
provisions of our agreement and the customer has communicated to us that this
termination was not due to service or compliance issues, but rather as a part of
a contract concession to its lender, who also provides cash access services. At
this time, we do not believe that the termination of this contract will have a
material adverse effect on our revenues, net income or cash flow from
operations. We also believe that we are entitled to a substantial reduction in
the purchase price paid pursuant to the Stock Purchase Agreement if this
contract is ultimately terminated. We are continuing discussions with this
customer and believe that this issue will be resolved during the second quarter
of fiscal 2005.
In May 2004, pursuant to the terms an executive's employment contract, the
Company granted 62,500 options to purchase shares of our common stock at an
exercise price of $.70 per share.
Pursuant to the terms of a common stock offering with registration rights, the
company has accrued penalties in the amount of 37,500 shares. The Company has
valued these shares at $31,960.
6
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. STOCKHOLDERS' DEFICIT (CONTINUED)
Stock option and warrant activity for the three months ended June 30, 2004 is
summarized as follows:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at March 31, 2004 ............. 7,269,064 $ .95
Granted ............................... 62,500 .70
Exercised ............................. - -
Canceled .............................. - -
--------- -----
Outstanding at June 30, 2004 .............. 7,331,564 $ .95
========= =====
The following table summarizes the Company's stock options and warrants
outstanding at June 30, 2004:
Options and
Warrants Outstanding
------------------------------------------
Weighted Weighted
Average Average
Range of Remaining Exercise
Exercise Price Number Life Price
-------------- --------- --------- --------
$2.40 - 4.00 237,500 4.00 $ 3.24
4.00-6.00 1,286,564 2.25 5.00
8.00 125,000 9.75 8.00
.01 5,620,000 9.75 .01
.70 62,500 10.00 .70
---------
7,331,564
=========
All outstanding options and warrants are exercisable at June 30, 2004.
Compensation expense, net income or earnings per share would not have changed
had the Company applied SFAS No. 123 instead of APB No. 25.
6. COMMITMENTS
a. LEASE COMMITMENTS
In conjuction with converting all of the Available Money ATM's, the Company now
pays rent to various mall properties where it has ATM machines. These monthly
rents average $42,000 per month.
The Company is party to a three year lease agreement pursuant to which it rents
office space in Pennsylvania at a monthly rent of $2,200. The first three months
of this lease will only require payment of monthly operating expenses.
The Company's total rent expense under operating leases was approximately
$141,703 and $3,123 for
7
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS (CONTINUED)
the three months ended June 30, 2004 and 2003, respectively.
7. CONCENTRATION OF CREDIT RISK
The Company maintains cash in bank accounts which exceed federally insured
limits. At June 30, 2004, the Company had deposits in excess of federally
insured amounts aggregating approximately $5,325,000 at various financial
institutions. The Company believes it has its cash deposits at high quality
financial institutions. In addition, the Company maintains a significant amount
of cash at each of the casinos. Management believes that the Company has
controls in place to safeguard these on-hand amounts, and that no significant
credit risk exists with respect to cash.
For the three months ended June 30, 2004, 27% of total revenues were derived
from operations at one casino.
8. DUE TO OFFICER
Amounts due to officer are evidenced by notes in the aggregate amounts of
$335,785 that bear interest at a rate of 10% per annum, payable monthly and are
due on demand. This amount consists of $100,000 loaned to the Company by the
officer in fiscal year 2004. This amount also includes a bonus due the officer
in the amount of $6,771 from 2002, sales commissions due the officer in the
amount of $21,029 from 2001, sales commissions due the officer in the amount of
$5,000 from fiscal year 2003 and the officer's fiscal year 2004 bonus per his
employment agreement in the amount of $205,800. Payments in the amount of $2,815
paid to the officer have been netted to this note.
9. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has an accumulated deficit
of $10,848,236 as of June 30, 2004 and had net losses for the three months ended
June 30, 2004 and a negative working capital of $5,905,446. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern.
Management is in the process of implementing its business plan. Additionally,
management is actively seeking additional sources of capital, but no assurance
can be made that capital will be available on reasonable terms. Management
believes the actions it is taking allow the Company to continue as a going
concern. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
8
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LITIGATION
On March 24, 2004, we filed a complaint in United States District Court for the
District of Delaware against Equitex, Inc. and its wholly-owned subsidiary, Chex
Services, Inc. d/b/a Fastfunds ("Chex"). In the complaint, we allege that
Equitex and Chex committed numerous breaches of the terms of the November 3,
2003 Stock Purchase Agreement pursuant to which we were to have acquired Chex
from Equitex, entitling us to terminate the Stock Purchase Agreement and receive
a $1,000,000 termination fee and reimbursement of our transaction costs from
Equitex and Chex, that Chex wrongfully and tortiously declared a default under
the $2,000,000 promissory note that we issued to Chex in connection with our
acquisition of Available Money, and that Equitex and Chex tortiously interfered
with our relationship with our senior lender. We seek to recover the $1,000,000
termination fee and transaction costs together with significant damages that
resulted from the defendants' breaches and tortuous conduct.
On March 23, 2004, Equitex filed an action in Delaware state court concerning
the same Stock Purchase Agreement at issue in the Delaware federal action that
we filed, alleging that Equitex was entitled to terminate the Stock Purchase
Agreement and receive a $1,000,000 termination fee and reimbursement of
transaction costs. We removed this action to the Delaware federal district
court. We are vigorously defending this action and believe that Equitex's and
Chex's claims are unfounded. We have filed a counterclaim that restates the
claims made in the federal action that we filed. We expect that the two Delaware
federal actions will be combined into a single case.
On March 15, 2004, Chex filed a complaint in the District Court of the State of
Minnesota for the County of Hennepin against us alleging that we defaulted on
interest payments on a $2,000,000 promissory note evidencing our obligation to
repay a loan that Chex extended to us in connection with our acquisition of
Available Money (the "Minnesota Complaint"). The complaint seeks payment of the
principal balance of the loan and accrued interest thereon. Chex further alleged
that we are liable to them for a penalty fee of $1,000,000 as the result of the
alleged termination by Equitex of the November 3, 2003 Stock Purchase Agreement.
We subsequently removed the Minnesota Complaint to the United States District
Court for the District of Minnesota. On June 23, 2004, the United States
District Court for the District of Minnesota transferred this action to the
United States District Court for the District of Delaware. We anticipate that
this action will be consolidated with the other actions listed above that are
pending in to the United States District Court for the District of Delaware. We
are vigorously defending this action, which is still in the pleadings stage, and
believe that Chex's claims lack merit.
On July 15, 2004, the former stockholders of Available Money, Inc. filed a
lawsuit in the United States District Court for the District of Delaware against
us and Christopher M. Wolfington, our Chief Executive Officer. The complaint
arises out of our purchase of the capital stock of Available Money, Inc.
pursuant to the Stock Purchase Agreement and alleges that we failed to make
required payments of the purchase price set forth in the Stock Purchase
Agreement. In addition, the former stockholders of Available Money also filed a
Motion for a Standstill Order/Temporary Restraining Order that the court denied
without a hearing. As we have paid $3,850,000 and tendered 1,470,590 shares of
common stock to the former Available Money stockholders which represents all
consideration due to them under the Stock Purchase Agreement, we believe that
this lawsuit is frivolous. Accordingly, we believe that the suit was filed for
inappropriate purposes and will vigorously defend against this action and seek
sanctions for filing of a frivolous suit. We also anticipate filing
counterclaims against Howard Regen, Helene Regen and Samuel K. Freshman seeking
substantial reduction in the purchase price and other damages and remedies based
on fraud and misrepresentations by them in connection with the transaction.
9
iGAMES ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LITIGATION (CONTINUED)
In addition, we are from time to time, during the normal course of our business
operations, subject to various litigation claims and legal disputes. We do not
believe that the ultimate disposition of any of these matters will have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
10
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-QSB INCLUDES FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WE HAVE BASED
THESE FORWARD-LOOKING STATEMENTS ON OUR CURRENT EXPECTATIONS AND PROJECTIONS
ABOUT FUTURE EVENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND ASSUMPTIONS ABOUT US THAT MAY CAUSE OUR ACTUAL
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY,"
"WILL," "SHOULD," "COULD," "WOULD," "EXPECT," "PLAN," ANTICIPATE," BELIEVE,"
ESTIMATE," CONTINUE," OR THE NEGATIVE OF SUCH TERMS OR OTHER SIMILAR
EXPRESSIONS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH A DISCREPANCY
INCLUDE, BUT ARE NOT LIMITED TO, THOSE INCLUDED IN OUR ANNUAL REPORT ON FORM
10-KSB FILED ON JULY 13, 2004. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the results of operations, financial
condition and liquidity should be read in conjunction with our financial
statements and notes thereto for the fiscal year ended March 31, 2004 appearing
in our most recent annual report on Form 10-KSB as filed with the Securities and
Exchange Commission on July 13, 2004.
HISTORY
iGames was incorporated in the State of Florida on May 9, 2001 under
the name Alladin Software, Inc. On June 25, 2001, it changed its name to iGames
Entertainment, Inc. On July 10, 2001, iGames Entertainment, Inc. was
incorporated in Nevada, and iGames Entertainment, Inc., a Florida corporation,
became a wholly-owned subsidiary. On January 2, 2004, iGames acquired Money
Centers pursuant to the merger of Money Centers with a wholly-owned subsidiary
of iGames formed for that purpose. In addition, on January 6, 2004, iGames
acquired the stock of Available Money, the operator of free-standing ATM
machines in casinos. The business operations of Available Money have been
combined with those of Money Centers.
The merger with Money Centers was accounted for as a reverse
acquisition. Although we were the legal acquirer in the merger, Money Centers
was the accounting acquirer since its shareholders acquired a majority ownership
interest in our company. Consequently, the historical financial information
included in the financial statements prior to January 2004 is that of Money
Centers. All significant intercompany transactions and balances have been
eliminated. We do not present pro forma information as the merger is a
recapitalization and not a business combination.
From inception until the acquisition of Money Centers, we were engaged
in developing, marketing, and distributing gaming and security applications for
the casino, hospitality, and entertainment industries. However, with the
acquisition of Money Centers and Available Money, we have ceased these
activities and have focused on the development and expansion of Money Centers'
business.
Money Centers was incorporated in the State of Delaware in 1997, but
was inactive until 1999. Money Centers' business model is to be an innovator and
industry leader in cash access and financial management services for the gaming
industry. Within the funds transfer and processing industries there exists niche
markets that are capable of generating substantial operating margins without the
requirement to process billions of dollars in transactions that is the norm for
the industry. We believe there is significant value to having a proprietary
position in each phase of the transaction process in the niche markets where
management has a proven track record. The gaming industry is an example of such
a market and is currently where we derive the majority of our revenues. We have
identified other markets with similar opportunities, however we have not
executed any plans to exploit these markets at this time.
11
From October 1999 until March 2001, Money Centers was a development
company focusing on the completion of a Point of Sale ("POS") transaction
management system for the gaming industry. In March 2001, Money Centers
commenced operations with the launch of the POS system at the Paragon Casino in
Marksville, LA. With the acquisition of Available Money, we currently provide
services in 22 locations across the United States.
CURRENT OVERVIEW
We completed our acquisitions of Money Centers and Available Money in
January 2004. We are continuing to aggressively pursue our integration of these
acquisitions into our business and to complete the conversion of all of
processing of the Available Money cash services business over to the systems
utilized by Money Centers. These conversions are timely and expensive, as they
include the purchase of new ATM hardware. We anticipate that this conversion
will cost us approximately $700,000 in fiscal 2005. Through June 30, 2004, we
had incurred approximately $200,000 in connection with this conversion and
believe that the conversion is approximately 25% complete.
We have also executed a plan to restructure our management team in an
effort to streamline our operations and reduce our selling, general and
administrative expenses. We believe that the changes resulting from this
restructuring plan will save us approximately an additional $200,000 more per
year than we had originally anticipated. We expect to start realizing these
savings in the second quarter of fiscal year 2005.
In fiscal 2005, we have met or exceeded our projected number of
transactions in each of our product lines. In addition, we believe that we have
sufficient capacity to handle additional customer accounts at our present level
of staffing and using our current systems and infrastructure. While our interest
expense has been higher than we anticipated, we are attempting to re-finance our
lines of credit to obtain more favorable financing arrangements, which will
lower our expenses and contribute to our profitability.
We seek to avoid litigation and to minimize our exposure to potential
claims arising in the normal course of our business and as a result of our
acquisitions. Despite these efforts, we have been named as a defendant in
several legal proceedings described in Part II, Item 1. Legal Proceedings
beginning on page 21 of this report. We are confident that it is in our best
interests to defend these claims and to pursue counterclaims where we believe
that we are likely to obtain a favorable result. During the three months ended
June 30, 2004, we have incurred approximately $138,000 in legal fees related to
these legal proceedings and anticipate incurring a substantial amount of
additional legal fees related to these legal proceedings throughout fiscal year
2005.
We generate revenues from transaction fees associated with each unique
service we provide, including ATMs, credit card advances, POS Debit, check
cashing, markers and various other financial instruments. We receive our fees
from either the casino operator or the consumer who is requesting access to
their funds. The pricing of each transaction type is determined by evaluating
risk and costs associated with the transaction in question. Accordingly, our
transaction fees have a profit component built into them. This is why the gaming
industry, which is recognized for its high transaction volume, is such a
lucrative market. Furthermore, reimbursement for electronic transactions are
guaranteed by the credit or debit networks and associations that process the
transactions as long as procedures are followed, thereby virtually eliminating
trade accounts receivable.
Companies providing cash access services to the gaming industry face
some unique challenges and opportunities in the next ten years. Many companies
in the industry have merged, been acquired or have recapitalized in order to
capitalize on the trends identified in the gaming industry.
Historically, providers of cash access services to the gaming industry
recognized cash flow margins that were unmatched in the funds transfer and
processing industries. Growing competition and the maturing of the market has
resulted in a decline in these margins as companies have begun marketing their
services based on price rather than innovation or value added services. This
trend is highlighted by the number of companies that promote revenue growth and
an increased account base but experience little increase in net income. This
trend is magnified by the fact that the largest participant in the industry has
close to 70% market share and has begun to forgo margin in order to retain
business. Companies that can adapt to the changing market and can create
innovative products and services stand at the forefront of new wave in revenue
and profit growth.
12
Substantially all gaming facilities provide ATM services, credit card
cash advances, debit, and/or check cashing services to their customers. Services
are typically outsourced and provided on an exclusive basis for an average of
two to five years. Each year, approximately 400 accounts totaling $300 million
in revenue are put out to bid. Currently there are five major companies,
including us, that have proprietary systems to compete for this business.
Although this market has matured from a pricing perspective, the demand for the
services from the end user is still strong.
Like most maturing markets, the companies that succeed are those that
are capable of reinventing themselves and the markets they serve. We believe
that smaller gaming properties will always look to have cash access services
provided in the traditional manner. There are several major trends occurring in
the gaming industry that will have a major impact on our industry and will
determine which companies emerge as industry leaders:
1. Consolidation of major casino companies that will put pressure on other
major casino companies to follow suit and will put pressure on smaller
casino companies to focus on service and value added amenities in order
to compete.
The consolidation of the major gaming companies will make it difficult
to continue to offer our services in the traditional manner. The economics are
too compelling for the gaming operators not to consider internalizing these
operations in order to generate additional revenue and profits to service the
debt associated with the consolidation. We have prepared for this change and
have already begun to offer our systems and services through the issuance of
Technology and Use Agreements. Instead of outsourcing the cash services
operations, we have begun to offer turn-key processing capabilities for internal
use by the casino. This means casinos will license our technology so they can
operate and maintain their own cash access services, including the addition of
their merchant card processing. Our size makes us uniquely capable of adapting
to this change. Though the license agreements do not have the same revenue
potential as a traditional cash services contract, the net income derived from
these agreements is higher, the user agreements are for a longer period of time
and we do not have the same capital expenditures or vault cash requirements that
we experience in performing traditional cash access services. Furthermore, our
larger competitors have spent years trying to conceal the economic benefits of
this type of offering because their large infrastructure is designed to only
support an outsourced solution.
2. Ticket In-Ticket Out technology growth exceeding expectations.
The first major casino company to remove coins from the casino floor
was Caesars Palace in Atlantic City, NJ. Since then, slot machine manufacturers
have developed a technology that prints and accepts bar-coded tickets at the
slot machine instead of accepting or dispensing coins. It was originally
anticipated that it would take 10-15 years for the industry to fully adopt this
technology. It appears it may only take half this amount of time. This presents
a problem to casino operators. They now have tens of thousands of bar-coded
tickets a day that need to be redeemed for cash. This has paved the way for
self-service ticket redemption technology so customers do not have to go to the
casino cage in order to redeem their tickets. The initial ticket redemption
machines placed in service have proven to be too big and too expensive. Most
casino operators have to wait until budget season to appropriate the necessary
funds in order to even consider the acquisition of the required equipment. We
believe this functionality will ultimately reside on the ATM machine thus
eliminating the requirement to purchase new equipment and eliminating the need
to remove a slot machine to make room for a stand-alone ticket redemption
device. We are developing technology that will allow ticket-redemption
functionality on our cash access devices. There is still the problem of security
with the bar-coded ticket, which is as good as cash. Many casino operators will
refuse to allow vendors to handle the tickets for security and fraud concerns.
This is an additional economic benefit of our plan to have the casino operator
internalize their cash access services because only the casino's personnel will
handle the tickets in the situations where they are licensing our services.
3. Execution of long-term and stable compacts for Indian Casinos in
numerous state jurisdictions has made traditional capital more readily
available paving the way for a new wave of expansion and the resulting
need for new sources of revenue and customer amenities.
Recent shortfalls in state budgets have brought the tribal and state
governments together to execute long-term compacts that meet the financial needs
of both parties. In recent years, California, Arizona, New Mexico and Wisconsin
are just a few examples of this development. The added financial stability for
Indian casinos has made
13
traditional capital more readily available to tribes, leading many tribes to
undertake expansion of casino facilities and operations.
In order to support this expansion, Indian casino operators will seek
new sources of revenues and new amenities to attract and retain more quality
customers. One of the most critical customer amenities in casino operations is
the availability of credit. Traditional gaming markets, such as Las Vegas and
Atlantic City, rely on credit issuance for up to 40% of their revenues. These
markets issue credit internally and rely on specialized credit reporting in
their risk management decisions. Significant capital investment in technology is
required for these transactions to be executed efficiently. However, within the
$15 billion dollar Indian Gaming market there are virtually no credit services
currently available. Approximately 26 of 29 states that have approved Indian
Gaming do not allow the Tribes or their respective casinos to issue credit. The
lack of credit play is also due to the lack of a third party credit issuer that
is capable of facilitating the transactions. Our Credit Plus platform allows
Indian casinos to issue credit to players, providing Indian casinos with a guest
amenity that is already widely accepted in traditional jurisdictions.
Our Cash Services Host Program is uniquely aimed at capitalizing on the
need for new profitable guest amenities. Where most guest amenities require
additional expenses, this service helps the casino operator generate more
revenues. This service allows customers to facilitate cash access transactions
from the slot machine or gaming table. Our hosts are available to bring the
transaction to the guest, which is viewed as a valuable customer amenity, while
driving more money to the gaming floor for the casino operator.
Organic growth through sales by internal salespeople is usually the
most efficient and profitable growth strategy in the cash services business.
Much of Money Centers' historical growth has occurred in this manner. We realize
that recognizing industry trends is no assurance of success. We continue to view
strategic acquisitions as part of our business plan to obtain the critical mass
we believe is necessary to compete effectively in our industry.
This parallel strategy of sales, acquisitions and product development
is capital intensive and presents substantial risk. There is no guarantee that
we will be able to manage all three strategies effectively.
We believe that it is necessary to increase our working capital
position so that we can capitalize on the profitable trends in the industry
while maintaining and servicing our current customer base. A major risk to our
business is that we utilize working capital for future growth at the expense of
executing on our integration and conversion plans. This would result in
substantially higher operating costs without the assurance of additional
revenues to support such costs.
CRITICAL ACCOUNTING POLICIES
In presenting our financial statements in conformity with accounting
principles generally accepted in the United States, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported results.
Check Cashing Bad Debt. The principal source of bad debts that we
experience are due to checks presented by casino patrons that are ultimately
returned by the drawer's bank for insufficient funds. We account for these check
cashing bad debts on a cash basis. Fees charged for check cashing are recorded
as income on the date the check is cashed. If a check is returned by the bank on
which it is drawn, we charge the full amount of the check as a bad debt loss. If
the check is subsequently honored by the bank, we recognize the amount of the
check as a negative bad debt. This conservative accounting policy may at times
overstate the impact of bad checks on our financial results, and adoption of a
different accounting policy could have a material impact on our reported
results.
14
Goodwill and Long-Lived Intangible Assets. The carrying value of
goodwill as well as other long-lived intangible assets such as contracts with
casinos is reviewed if the facts and circumstances suggest that they may be
impaired. With respect to contract rights in particular, which have defined
terms, this will result in an annual adjustment based on the remaining term of
the contract. If this review indicates that the assets will not be recoverable,
as determined based on our discounted estimated cash flows over the remaining
amortization period, then the carrying values of the assets are reduced to their
estimated fair values in accordance with Statement of Financial Accounting
Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS ("FAS 144"). The calculation of fair value includes a number of estimates
and assumptions, including projections of future income and cash flows, the
identification of appropriate market multiples and the choice of an appropriate
discount rate.
Stock Based Compensation. We account for stock based compensation
utilizing Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. We have chosen to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the estimated fair market value of our stock at the date of
the grant over the amount an employee must pay to acquire the stock. We have
adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148
(See New Accounting Pronouncements), which require pro forma disclosures of net
income and earnings per share as if the fair value method of accounting had been
applied.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 VS. THREE MONTHS ENDED JUNE 30, 2003
Three Months Ended Three Months Ended
June 30, 2004 ($) June 30, 2003 ($) Change ($)
------------------ ------------------ ----------
Net Income (Loss) .......... (623,842) 37,698 (661,540)
Revenues ................... 4,614,557 1,327,088 3,287,469
Operating Expenses ......... 3,455,553 963,159 2,492,394
Selling, General and
Administrative Expenses ... 806,232 266,957 539,275
Other Income (Expenses) .... (976,614) (59,274) (917,340)
Our net loss increased during the three months ended June 30, 2004 due
to non-recurring expenses related to the integration of our acquisitions of
Money Centers and Available Money into our business, higher interest expenses
related to our increased sales volume and high legal expenses related to legal
proceedings that we anticipate may continue throughout fiscal year 2005.
Our revenues increased by approximately 248% during the three months
ended June 30, 2004 as compared to the three months ended June 30, 2003. Our
revenues increased during the three months ended June 30, 2004 due to a 6%
increase in Money Centers' sales over the prior period and the acquisition of
Available Money at the beginning of the fourth quarter of fiscal 2004, adding 91
ATM's at 18 locations throughout the United States. In addition, Money Centers
experienced increased transaction volume. In calendar year 2003, Money Centers'
POS system facilitated 892,915 transactions (75% increase over calendar year
2002) totaling $140,536,954 (44% increase over calendar year 2002) generating
over $5.5 million in revenue (63% increase over calendar year 2002). Assuming no
additional customer sales, for calendar year 2004 we are on pace to facilitate
over 5.0 million transactions totaling over $578,000,000. During the six months
ended June 30, 2004, Money Centers' POS system facilitated approximately
3,571,000 transactions totaling
15
approximately $373,000,000. Our results of operations and revenue growth
exceeded expectations though our number of new accounts was lower than
anticipated. However, at the end of fiscal year 2004, we were successful in
launching two major products that are essential to our future success;
CreditPlus and our Cash Services Host Program, both of which are currently
generating new revenues and profits.
Our operating expenses increased during the three months ended June 30,
2004 due to the transaction processing expenses and casino commissions related
to the increase in our transaction volume. In addition, some of the new casino
contracts provided for higher casino commissions than under our existing
contracts.
Our selling, general and administrative expenses increased during the
three months ended June 30, 2004 primarily due to $140,000 in expenses related
to the conversion of all of processing of the Available Money cash services
business over to the systems utilized by Money Centers, $140,000 of rent expense
related to Available Money contracts and mall properties, and $138,000 in legal
fees related to pending legal proceedings.
Our other expenses increased during the three months ended June 30,
2004 mostly due to a $628,803 increase in interest expense. This increase was
due to us having $5,260,710 of our lines of credit used at June 30, 2004 at an
average interest rate of 14.9% as opposed to $2,438,038 of our lines of credit
used at June 30, 2004 at an average interest rate of 12.5%. These additional
draws on our lines of credit were necessary to satisfy our increased transaction
volume and to make the second cash payment of purchase price to the former
stockholders of Available Money. We are in the process of evaluating our options
to re-finance our existing lines of credit at a lower rate of interest. In
addition, our vault cash expense related to the conversion of Available Money's
ATMs to Money Centers' systems has been approximately three times higher than
the anticipated level. We have identified the problem and are in the process of
resolving it. We anticipate that we will continue to incur this higher interest
expense related to the conversion of the ATMs through the second quarter of
fiscal 2005 but are confident that we will lower this expense to anticipated
levels in the third quarter of fiscal 2005. Our other expenses also increased
during the three months ended June 30, 2004 due to a $287,707 increase in
depreciation and amortization expenses. These expenses increased due to an
increase in amortization expense due to the amortization of Available Money's
contract rights over their terms.
OFF-BALANCE SHEET ARRANGEMENTS
There were no off-balance sheet arrangements during the fiscal quarter
ended June 30, 2004 that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to our investors.
CHANGES IN FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended Three Months Ended
June 30, 2004 ($) June 30, 2003 ($) Change ($)
------------------ ------------------ ----------
Net Cash Provided by
Operating Activities ...... 252,756 375,106 (122,350)
Net Cash Used in
Investing Activities ...... (9,962) (245,577) 235,615
Net Cash Used in
Financing Activities ...... (79,779) (103,179) 23,400
Net cash provided by operating activities decreased during the first
three months of June 30, 2004 primarily due to our significant net loss and
increases in accounts receivable and prepaid expenses, offset by increased
depreciation and amortization and a significant increase in accounts payable.
16
Net cash used in investing activities decreased during the first three
months of fiscal year 2005 due to a significant decline in the amount of
tangible and intangible assets purchased and the amount of deferred financing
costs.
Net cash used in financing activities decreased during the first three
months of fiscal year 2005 due to our decrease in notes payable and increase in
restricted cash offset by an increase in the amounts drawn on our lines of
credit.
Our available cash equivalent balance at June 30, 2004 was
approximately $395,033 and was approximately $84,724 at July 31, 2004. From
inception through March 31, 2003, we raised an aggregate of approximately
$2,500,000 in capital through the sale of our equity securities. In addition, we
issued two 10% convertible promissory notes in the aggregate principal amount of
$250,000 to one investor. In October 2002, this investor converted a $150,000
note into 300,000 shares of our common stock, and from July 2003 through
December 2003, we repaid an additional $90,000 of this debt. We intend to repay
the remaining principal balance of this note of $10,000 in fiscal 2005.
In January 2004, we completed our merger with Money Centers and our
acquisition of Available Money. Each of Money Centers and Available Money have
established operations. In addition, Money Centers has an existing vault cash
line of credit of $3,000,000. All of this line of credit is available to fund
our vault cash needs. We must obtain the consent of the lender to use any of
this line to fund our other operating expenses. Management believes that these
sources of cash flow will be sufficient to fund our operations for at least the
next twelve months.
A significant portion of our existing indebtedness is associated with
our line of credit of $3,000,000 with Mercantile Capital, L.P., which we use to
provide vault cash for our operations. Vault cash is not working capital but
rather the money necessary to fund the float, or money in transit, that exists
when customers utilize our services but we have yet to be reimbursed from the
Debit, Credit Card Cash Advance, or ATM networks for executing the transactions.
Although these funds are generally reimbursed within 24-48 hours, due to the
magnitude of our transaction volume, a significant amount of cash is required to
fund our operations. Our vault cash loan accrues interest at the base commercial
lending rate of Wilmington Trust Company of Pennsylvania plus 10.75% per annum
on the outstanding principal balance, with a minimum rate of 15% per annum, and
has a maturity date of May 31, 2005. Our obligation to repay this loan is
secured by a first priority lien on all of our assets.
We incurred $6,000,000 of debt associated with our acquisition of
Available Money. $2,000,000 of this indebtedness was paid by tender of an
aggregate of 1,470,590 shares of our common stock to the previous shareholders
of Available Money. The terms of the Stock Purchase Agreement allow for certain
purchase price adjustments associated with this indebtedness that may lower the
actual amount we are required to pay. The actual amount paid will not be
determined until certain events outlined in the Stock Purchase Agreement have
materialized. As of the date of this report, we have withheld $150,000 of the
purchase price set forth in the Stock Purchase Agreement due to non-renewal of
certain Available Money contracts and claims against Available Money for
reimbursement of expenses that they are obligated to pay pursuant to the Stock
Purchase Agreement. We have been informed that one of Available Money's casino
customers intends to terminate its contract with Available Money prior to the
conclusion of the term of the contract. We are confident that the contract does
not permit early termination and this customer has communicated to us that this
termination was not due to service or compliance issues but as the result of as
a contract concession to its lender, who also provides cash access services. At
this time, we do not believe that the termination of this contract will have a
material adverse effect on our revenues, net income or cash flow from
operations. We also believe that we are be entitled to a substantial reduction
in the purchase price paid pursuant to the Stock Purchase Agreement if this
customer ultimately terminates this contract. We are continuing discussions with
this customer and believe that this issue will be resolved during the second
quarter of fiscal 2005.
An additional $2,000,000 of this indebtedness is a loan provided by
Chex Services, Inc. We have filed suit against Chex Services regarding certain
breaches to the term note evidencing our obligation to repay this loan and
breaches to a Stock Purchase Agreement entered into by the parties in November
2003. It is our position that the damages we suffered as a result of the
breaches by Chex Services, Inc. exceed the principal amount of this loan. We
will continue to record this note as a liability until a judgment is rendered in
the lawsuit.
17
The final $2,000,000 of this indebtedness is a bridge loan provided by
Mercantile Capital, L.P. This bridge loan accrues interest at an annual rate of
17% and has a maturity date of May 1, 2005. Our obligation to repay this loan is
secured by a first priority lien on all of our assets. We intend to refinance
this obligation in fiscal 2005. We paid a facility fee of $41,000 in connection
with this loan.
Though we anticipate our operating profits will be sufficient to meet
our current obligations under our credit facilities, if we become unable to
satisfy these obligations, then our business will be adversely affected as
Mercantile Capital will execute its lien and sell our assets to satisfy any
amount of outstanding indebtedness under our line of credit loan or our term
loan that we are unable to repay.
We also have a substantial amount of accounts payable and accrued
expenses. To the extent that we are unable to satisfy these obligations as they
come due, we risk the loss of services from our vendors and possible lawsuits
seeking collection of amounts due.
In addition, we have an existing obligation to redeem 37,500 shares of
our common stock from an existing stockholder at an aggregate price of $41,250.
This obligation arose in connection with our purchase of certain gaming software
products for 75,000 shares of our common stock. In order to complete this
transaction under these terms, our former management granted this stockholder
the option to have 37,500 shares of his stock redeemed. This stockholder has
elected to exercise this redemption option.
We are also in the process of converting out all of the former
Available Money ATMs that are presently processed by Fifth Third Bank and
replacing them with new ATMs, which we will process through our own systems. As
part of this process we will replace all of the ATMs at the locations that
Available Money presently provides ATM service. Under the agreement with Fifth
Third Bank, Fifth Third Bank recognized all revenues and expenses from these
ATMs, and Available Money recognized only its share of net income generated by
these ATMs. Following this conversion. We will recognize all revenues and
expenses from the ATMs, resulting in increased revenues and operating expenses
of approximately $9,800,000 and $8,200,000, respectively, per year. We
anticipate that this conversion will cost approximately $700,000 to complete in
fiscal 2005. As we plan to process all transactions at these ATMs, we will
recognize all fees generated as revenues. If we did not convert these ATM's and
allowed their transactions to be processed by a third party, then we would only
be permitted to record the fees net of processing costs as revenues.
Our goal is to change the way our customers view cash access services
through transforming the way casinos find, serve and retain their customers. We
will strive to make our customers the best they can be by continuing to grow and
improve everything we do. We require significant capital to meet these
objectives. Our capital requirements are as follows:
o Equipment: Each new account requires hardware at the location level and
some additions to network infrastructure at our central server farm.
o Vault Cash: All contracts in which we provide full service money
centers and ATM accounts for which we are responsible for cash
replenishment require vault cash. Vault cash is the money necessary to
fund the float that exists when we pay money to patrons but have yet to
be reimbursed from the Debit, Credit Card Cash Advance, or ATM networks
for executing the transactions.
o Acquisition Financing: We presently have little to no cash for use in
completing additional acquisitions. To the extent that we cannot
complete acquisitions through the use of our equity securities, we will
need to obtain additional indebtedness or seller financing in order to
complete such acquisitions.
o Working Capital: We will require substantial working capital to pay the
costs associated with our expanding employee base and to service our
growing base of customers.
o Technology Development: We will continue to incur development costs
related to the design and development of our new products and related
technology. We presently do not have an internal staff of engineers or
software development experts and intend to outsource this function.
18
We are actively seeking various sources of growth capital and strategic
partnerships that will assist us in achieving our business objectives. We are
also exploring various potential financing options and other sources of working
capital. There is no assurance that we will succeed in finding additional
sources of capital on favorable terms or at all. To the extent that we cannot
find additional sources of capital, we may be delayed in fully implementing our
business plan.
The holders of our Series A Preferred Stock have redemption rights
that, if exercised, would require us to redeem our issued and outstanding shares
of Series A Preferred Stock and 2,500,000 issued and outstanding stock purchase
warrants in exchange for the issued and outstanding common stock of Money
Centers of America, Inc. If these redemption rights are exercised, we will lose
a significant portion of our existing operations and our results of operations
will decline. In addition, there would also be significant risk that our
remaining operations would be eliminated as the vault cash lines of credit and
debt that we incurred in connection with our acquisition of Available Money are
guaranteed by the majority holder of the Series A Preferred Stock. These credit
facilities could potentially go into default as a result of the exercise of the
Series A Preferred redemption rights, which would leave us without the vault
cash necessary to operate our remaining business. A special committee of our
board of directors has reached an agreement with the holders of our Series A
Preferred Stock pursuant to which we will complete a recapitalization which
will, among other things, result in the termination of these redemption rights
and effective conversion to common stock of the Series A Preferred Stock and
certain warrants issued in our acquisition of Money Centers. Following the
recapitalization, the holders of our Series A Preferred Stock and those warrants
will own an aggregate of approximately 85% of our issued and outstanding capital
stock (calculated on a fully diluted basis) as opposed to the approximately 81%
they presently own.
We do not pay and do not intend to pay dividends on our common stock.
We believe it to be in the best interest of our stockholders to invest all
available cash in the expansion of our business. We presently have a liability
for dividends payable of $23,875 related to dividends declared by Money Centers
prior to our merger that have not yet been paid.
Due to our accumulated deficit of $10,224,394 as of March 31, 2004, our
net losses and cash used in operations of $6,634,586 and $158,948, respectively,
for the year ended March 31, 2004, our independent auditors have raised
substantial doubt about our ability to continue as a going concern. At June 30,
2004, our accumulated deficit was $10,848,236. During the three months ended
June 30, 2004, our net losses were $623,842. However, net cash provided by
operating activities was $252,756. While we believe that our present plan of
operations will be profitable and will generate positive cash flow, there is no
assurance that we will generate net income or positive cash flow in fiscal year
2005 or at any time in the future.
ITEM 3 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2004 (the "Evaluation Date"), and, based
on their evaluation, our chief executive officer and chief financial officer
have concluded that these controls and procedures were effective as of the
Evaluation Date. There were no significant changes in our internal controls or
in other factors that could significantly affect these controls during the
quarter ended June 30, 2004.
Disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-14(c) and 15d-14(c)) are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management to allow timely decisions regarding required
disclosure.
The Certifying Officers have also indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
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Our management, including each of the Certifying Officers, does not
expect that our disclosure controls or our internal controls will prevent all
error and fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the control. The design of any systems of controls also
is based in part upon certain assumptions about the likelihood of future events,
and their can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of these inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On March 24, 2004, we filed a complaint in United States District Court
for the District of Delaware against Equitex, Inc. and its wholly-owned
subsidiary, Chex Services, Inc. d/b/a Fastfunds ("Chex"). In the complaint, we
allege that Equitex and Chex committed numerous breaches of the terms of the
November 3, 2003 Stock Purchase Agreement pursuant to which we were to have
acquired Chex from Equitex, including (i) false representations and warranties
related to terminated Chex casino contracts and over $600,000 in bad debts, (ii)
material misrepresentations in SEC filings, (iii) entering into a material
financing transaction in violation of the covenant not to enter into
transactions outside the ordinary course of business, and (iv) failure to
proceed in good faith toward closing, including notifying iGames that Equitex
could not close on the transaction as structured. These breaches entitled us to
terminate the Stock Purchase Agreement and receive a $1,000,000 termination fee
and reimbursement of our transaction costs (estimated at over $750,000) from
Equitex and Chex. Our complaint also states that Chex wrongfully and tortiously
declared a default under the $2,000,000 promissory note that we issued to Chex
in connection with our acquisition of Available Money, and that Equitex and Chex
tortiously interfered with our relationship with our senior lender. We seek to
recover the $1,000,000 termination fee and transaction costs together with
significant damages that resulted from the defendants' breaches and tortuous
conduct.
On March 23, 2004, Equitex filed an action in Delaware state court
concerning the same Stock Purchase Agreement at issue in the Delaware federal
action that we filed, alleging that Equitex was entitled to terminate the Stock
Purchase Agreement and receive a $1,000,000 termination fee and reimbursement of
transaction costs. We removed this action to the Delaware federal district
court. We are vigorously defending this action and believe that Equitex's and
Chex's claims are unfounded. We have filed a counterclaim that restates the
claims made in the federal action that we filed. We expect that the two Delaware
federal actions will be combined into a single case.
On March 15, 2004, Chex filed a complaint in the District Court of the
State of Minnesota for the County of Hennepin against us alleging that we
defaulted on interest payments on a $2,000,000 promissory note evidencing our
obligation to repay a loan that Chex extended to us in connection with our
acquisition of Available Money (the "Minnesota Complaint"). The Minnesota
Complaint seeks payment of the principal balance of the loan and accrued
interest thereon. Chex further alleged that we are liable to them for a penalty
fee of $1,000,000 as the result of the alleged termination by Equitex of the
November 3, 2003 Stock Purchase Agreement. We subsequently removed the Minnesota
Complaint to the United States District Court for the District of Minnesota. On
June 23, 2004, the United States District Court for the District of Minnesota
transferred this action to the United States District Court for the District of
Delaware. We anticipate that this action will be consolidated with the other
actions listed above that are pending in to the United States District Court for
the District of Delaware. We are vigorously defending this action, which is
still in the pleadings stage, and believe that Chex's claims lack merit.
We are involved in litigation with the former owners of Available
Money, Inc. We have determined that we may be entitled to a substantial
reduction in the purchase price and that the former owners made material
misrepresentations to us in connection with the Stock Purchase Agreement and our
acquisition of Available Money, Inc. In response to our effects to resolve the
matter, on July 15, 2004, the former owners of Available Money, Inc. filed a
lawsuit in the United States District Court for the District of Delaware against
us and Christopher M. Wolfington, our Chief Executive Officer, alleging that we
failed to make required payments of the purchase price set forth in the Stock
Purchase Agreement. In addition, the former stockholders of Available Money also
filed a Motion for a Standstill Order/Temporary Restraining Order that the court
denied without a hearing. We have paid or tendered to the former Available Money
stockholders all consideration now due to them under the Stock Purchase
Agreement, we believe that this lawsuit is frivolous and was filed for
inappropriate purposes. We will vigorously defend against this action and seek
sanctions for filing of a frivolous suit. We also anticipate filing
counterclaims against Howard Regen, Helene Regen and Samuel K. Freshman seeking
substantial reduction in the purchase price and other damages and remedies based
on fraud and misrepresentations by them in connection with the transaction.
In addition, we are from time to time, during the normal course of our
business operations, subject to various litigation claims and legal disputes. We
do not believe that the ultimate disposition of any of these matters will have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
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ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective as of April 12, 2004, we issued 735,295 shares of our common
stock to each of Helene Regen and Samuel K. Freshman as the final payment due
pursuant to the Stock Purchase Agreement dated January 6, 2004 that we entered
into with Ms. Regen and Mr. Freshman. These shares were issued pursuant to
Section 4(2) of the Securities Act.
In May 2004, we granted options to purchase 62,500 shares of our common
stock at an exercise price of $.70 per share to our former chief executive
officer pursuant to the terms of his employment agreement. These shares were
issued pursuant to Section 4(2) of the Securities Act.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER EVENTS
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-B
3.1 Articles of Incorporation of iGames Entertainment, Inc.
(incorporated by reference to Exhibit 3.1 of our Registration
Statement on Form SB-2 filed on January 18, 2002).
3.2 By-laws of iGames Entertainment, Inc. (incorporated by
reference to Exhibit 3.2 of our Registration Statement on Form
SB-2 filed on January 18, 2002).
3.3 Articles of Amendment to Articles of Incorporation
(incorporated by reference to Exhibit 3.3 of Amendment No. 1
to our Registration Statement on Form SB-2 filed on March 8,
2002).
4.1 Stock Pledge and Registration Rights Agreement by and between
iGames Entertainment, Inc. and Mercantile Capital, L.P. dated
as of November 26, 2003.
4.2 Form of Specimen Stock Certificate (incorporated by reference
to Exhibit 4.2 of our Registration Statement on Form SB-2
filed on January 18, 2002).
10.1 Amendment No. 1 to Loan and Security Agreement by and between
iGames Entertainment, Inc. and Mercantile Capital, L.P. dated
April 30, 2004.
10.2 Term Loan Note payable to the order of Mercantile Capital,
L.P. in the principal amount of $2,050,000 dated April 30,
2004.
31.1 Certification dated August 16, 2004 pursuant to Exchange Act
Rule 13a-14(a) or 15d-14(a) of the Principal Executive Officer
and Principal financial Officer as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, by Christopher M.
Wolfington, Chief Executive Officer and Chief Financial
Officer.
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32.1 Certification dated August 16, 2004 pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, made by Christopher M. Wolfington,
Chief Executive Officer and Chief Financial Officer.
(b) Reports on Form 8-K
On May 13, 2004, we filed a Current Report on Form 8-K reporting that
we had issued a press release announcing that we had agreed with Christopher M.
Wolfington, the holder of a majority of the issued and outstanding shares of our
Series A Preferred Stock, to extend until September 30, 2004, the deadline for
the Series A Preferred Stockholders to exercise their redemption rights.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereto
duly authorized.
IGAMES ENTERTAINMENT, INC.
Date: August 16, 2004 By: /s/ Christopher M. Wolfington
-----------------------------
Christopher M. Wolfington
Chief Executive Officer and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
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