Item
1. Financial Statements.
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheet
s
September 30, 2007 and December 31, 2006
(Unaudited)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
14,050
|
|
$
|
73,367
|
|
Total
current assets
|
|
|
14,050
|
|
|
73,367
|
|
|
|
|
|
|
|
|
|
Equipment
and Furnishings
,
net of accumulated depreciation of $62,062
and
$53,756
|
|
|
16,604
|
|
|
30,827
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
30,654
|
|
|
104,194
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
98,068
|
|
$
|
103,230
|
|
Accrued
expenses
|
|
|
574,065
|
|
|
413,452
|
|
Accrued
compensation - officers
|
|
|
748,373
|
|
|
540,365
|
|
Total
current liabilities
|
|
|
1,420,506
|
|
|
1,057,047
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
Senior
secured note payable, net of unamortized debt discount of
$480,788
and $647,340
|
|
|
1,519,212
|
|
|
1,352,660
|
|
Total
liabilities
|
|
|
2,939,718
|
|
|
2,409,707
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Deficiency
|
|
|
|
|
|
|
|
Preferred
stock, par value $10 per share; 10,000,000 shares
authorized
|
|
|
|
|
|
|
|
Class
A convertible preferred stock, par value $10 per share;
|
|
|
|
|
|
|
|
1,000,000
shares designated; none issued
|
|
|
-
|
|
|
-
|
|
Class
B preferred stock, par value $10 per share;
|
|
|
|
|
|
|
|
1,000,000
shares designated; none issued
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $.01 per share; 150,000,000 shares authorized;
|
|
|
|
|
|
|
|
19,830,602
and 19,830,602 shares issued and outstanding
|
|
|
198,306
|
|
|
198,306
|
|
Additional
paid-in capital
|
|
|
6,791,778
|
|
|
6,791,778
|
|
Accumulated
deficit
|
|
|
(10,039,100
|
)
|
|
(9,434,618
|
)
|
Accumulated
other comprehensive income - foreign currency translation
gains
|
|
|
139,952
|
|
|
139,021
|
|
Total
stockholders’ deficiency
|
|
|
(2,909,064
|
)
|
|
(2,305,513
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficiency
|
|
$
|
30,654
|
|
$
|
104,194
|
|
See
accompanying notes to condensed consolidated financial
statements
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations For the Nine and Three Months ended
September
30, 2007 and 2006
(Unaudited)
|
|
|
Nine
Months Ended September 30,
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
-
|
|
$
|
139,777
|
|
$
|
-
|
|
$
|
-
|
|
Product
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
revenues
|
|
|
-
|
|
|
139,777
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
-
|
|
|
73,935
|
|
|
-
|
|
|
-
|
|
Product
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
cost of revenues
|
|
|
-
|
|
|
73,935
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
-
|
|
|
65,842
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
-
|
|
|
150,241
|
|
|
-
|
|
|
56,223
|
|
Selling,
general and administrative
expenses
|
|
|
291,415
|
|
|
594,475
|
|
|
57,220
|
|
|
150,171
|
|
Total
operating expenses
|
|
|
291,415
|
|
|
744,716
|
|
|
57,220
|
|
|
206,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(291,415
|
)
|
|
(678,874
|
)
|
|
(57,220
|
)
|
|
(206,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense and amortization of debt discount
|
|
|
(331,496
|
)
|
|
(328,526
|
)
|
|
(110,120
|
)
|
|
(111,613
|
)
|
Other
income
|
|
|
18,429
|
|
|
22,059
|
|
|
9,553
|
|
|
5,851
|
|
Gain
on sale of assets
|
|
|
-
|
|
|
204,736
|
|
|
-
|
|
|
(4,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(313,067
|
)
|
|
(101,731
|
)
|
|
(100,567
|
)
|
|
(110,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(604,482
|
)
|
$
|
(780,605
|
)
|
$
|
(157,787
|
)
|
$
|
(317,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
19,830,602
|
|
|
19,830,602
|
|
|
19,830,602
|
|
|
19,830,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
$
|
(0.01
|
)
|
|
(0.02
|
)
|
See
accompanying notes to condensed consolidated financial statements
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Condensed
Consolidated Statement of Stockholders’ Deficiency
For
the Nine Months ended September 30, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Total
|
|
Balance
at January 1, 2007
|
|
|
19,830,602
|
|
$
|
198,306
|
|
$
|
6,791,778
|
|
$
|
(9,434,618
|
)
|
$
|
139,021
|
|
$
|
(2,305,513
|
)
|
Foreign
currency translation loss (A)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
931
|
|
|
931
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(604,482
|
)
|
|
-
|
|
|
(604,482
|
)
|
Balance
at September 30, 2007
|
|
|
19,830,602
|
|
$
|
198,306
|
|
$
|
6,791,778
|
|
$
|
(10,039,100
|
)
|
$
|
139,952
|
|
$
|
(2,909,064
|
)
|
|
|
|
(A)
Comprehensive loss (net loss plus or minus foreign currency translation loss
or
gain) for the nine and three months ended September 30, 2007 and 2006 totaled
$603,551, $778,583, $156,856 and $314,995, respectively.
See
accompanying notes to condensed consolidated financial statements
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows For the Nine Months ended September 30,
2007 and 2006 (Unaudited)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(604,482
|
)
|
$
|
(780,605
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Gain
on sale of assets
|
|
|
-
|
|
|
(204,736
|
)
|
Amortization
of debt discount
|
|
|
166,551
|
|
|
166,551
|
|
Amortization
of intellectual property
|
|
|
-
|
|
|
7,730
|
|
Amortization
of deferred rent
|
|
|
-
|
|
|
(6,611
|
)
|
Depreciation
expense
|
|
|
16,489
|
|
|
36,377
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
-
|
|
|
91,580
|
|
Accounts
payable
|
|
|
(7,727
|
)
|
|
(84,028
|
)
|
Accrued
expenses
|
|
|
160,457
|
|
|
141,396
|
|
Accrued
compensation - officers
|
|
|
208,009
|
|
|
230,309
|
|
Net
cash used in operating activities
|
|
|
(60,703
|
)
|
|
(402,037
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Proceed
from sale of intangible assets
|
|
|
-
|
|
|
500,000
|
|
Proceeds
from sale of equipment and furnishings
|
|
|
-
|
|
|
21,000
|
|
Acquisition
of equipment and furnishings
|
|
|
-
|
|
|
(2,278
|
)
|
Net
cash provided by investing activities
|
|
|
-
|
|
|
518,722
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Payment
of note payables
|
|
|
-
|
|
|
(55,548
|
)
|
Net
cash used in financing activities
|
|
|
-
|
|
|
(55,548
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
1,386
|
|
|
1,776
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in cash
|
|
|
(59,317
|
)
|
|
62,913
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
73,367
|
|
|
122,318
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
14,050
|
|
$
|
185,231
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
Interest
paid
|
|
$
|
-
|
|
$
|
21,285
|
|
See
accompanying notes to condensed consolidated financial statements
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1 - Business and Organization
On
January 12, 2004, Gaming & Entertainment Group, Inc., a Nevada corporation
(“G&EG Nevada”) consummated a transaction with NorStar Group, Inc., a
publicly-held company incorporated in Utah that was not conducting or developing
any commercial operations (“NorStar”). Subsequently, NorStar changed its name to
Gaming & Entertainment Group, Inc. (“G&EG” or the “Company”). As a
result of the exchange, G&EG Nevada became a subsidiary of G&EG. In May
2005, G&EG Nevada was dissolved.
Historically,
the Company has been involved in the development of Internet gaming systems
and
games for third parties, and software for amusement with prizes (“AWP”) and
Section 16 gaming machines for the United Kingdom and European gaming
markets.
The
Company has terminated its gaming initiatives in the United Kingdom due to
failure to obtain sales by and through its third party manufacturer and
distribution. Many other factors have had a negative impact on the U.K. arcade
market. Under the U.K. Gambling Act 2005, which came into operation on September
1, 2007, Section 16 machines were replaced by Category B3 machines. Feedback
from operators shows that the player base has responded negatively to the new
B3
format which is limited to a £1 stake. Further, a prohibition on smoking in
enclosed public establishments, including arcades, and a limitation on the
number of B3 gaming machines allowed in such establishments, has contributed
to the significant decline in machine revenues, and the consequent lack of
demand for new machines in the marketplace.
Note
2 - Basis of Presentation and Significant Accounting
Policies
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted from this report,
as is permitted by such rules and regulations; however, in the opinion of
management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments,
necessary to make the presentation of the Company’s financial position as of
September 30, 2007 and its results of operations and cash flows for the interim
periods presented not misleading. Results of operations for interim periods
are
not necessarily indicative of results for the full years of which they are
a
part.
Business
Condition
The
accompanying unaudited condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. As reflected
in
the financial statements, the Company incurred losses of $604,482 and $157,787
for the nine and three months ended September 30, 2007, respectively, and
recurring losses in prior years. As of September 30, 2007, the Company had
an
accumulated deficit of $10,039,100 and a stockholders’ deficiency of $2,909,062.
These conditions raise substantial doubt about the Company’s ability to continue
as a going concern for a reasonable period of time. Further, the Company’s sole
remaining source of potential revenue, in the form of royalties from its
Internet gaming platform that was sold to Cantor G&W, L.P. in February 2006,
has not materialized as of the date of this filing and there can be no
assurances that revenues, in the form of royalties, will be realized in the
future. Accordingly, the Company is actively discussing a potential merger
with
an operating company whereby the Company would receive cash and/or retain some
percentage of the issued and outstanding common stock of the Company on a
post-merger basis. There can be no assurance that the Company will be successful
in this regard. In the event the Company is successful, the stockholders of
the
Company will incur significant dilution in such a transaction.
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company had a working capital deficiency of $1,406,456 at September 30, 2007,
and used $60,703 of net cash in operating activities in the nine months ended
September 30, 2007.
The
Company has undertaken an assessment as to whether its long-lived assets have
been impaired during the three months ended September 30, 2007. Impairment
losses on long-lived assets, such as equipment, are recognized when events
or
changes in circumstances indicate that the undiscounted cash flows estimated
to
be generated by such assets are less than their carrying value and, accordingly,
all or a portion of such carrying value may not be recoverable. Impairment
losses are then measured by comparing the fair value of assets to their carrying
amounts. Based on its assessment, the Company does not believe its long-lived
assets have been impaired.
Through
September 30, 2007, the Company has funded its operations primarily through
the
issuance of common stock, promissory notes, warrants and options to outside
investors for cash and consultants and others for services. As noted above,
the
Company has commenced its search for an operating company to merge with, and
if
the Company is not successful in doing so, it will have terminate its
operations.
The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classifications of liabilities that might be necessary in the event
the Company cannot continue as a going concern.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Revenue
Recognition
Revenues,
in the form of a royalty (“Royalty”) relating to the utilization of the
Company’s proprietary Internet gaming platform previously sold to Cantor G&W
(Nevada), L.P., or Cantor, will be recognized as earned over the term of the
agreement based upon a percentage of the gross win realized by Cantor, from
its
licensee(s), following repayment of certain expenses. When the Company receives
a Royalty from Cantor, which it has not as of the nine and three months ended
September 30, 2007, such Royalty will be applied against the outstanding note
payable in favor of Cantor as discussed herein. The Company has recently learned
that Cantor G&W (Nevada), L.P. terminated operations relating to the Cantor
Casino. It is the Company’s understanding that the Internet gaming platform may
be currently utilized by third parties. The Company is not privy to the terms,
if applicable, of such arrangements. There can be no assurance that the Company
will realize revenues from the Royalty in any future period.
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Net
Loss per Share
The
Company presents “basic” earnings (loss) per share and, if applicable, “diluted”
earnings per share pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). Basic earnings
(loss) per share is calculated by dividing net income or loss by the weighted
average number of common shares outstanding during each period. The calculation
of diluted earnings per share is similar to that of basic earnings per share,
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if all potentially dilutive
common shares, such as those issuable upon the exercise of options and warrants,
were issued during the period and the treasury stock method had been applied.
Since the Company had net losses for the three and nine months ended September
30, 2007 and 2006, the effects of the assumed exercise of outstanding options
and warrants would have been anti-dilutive and, accordingly, basic and diluted
net loss per share in each period were the same. As of September 30, 2007 and
2006, the Company had options and warrants outstanding for the purchase of
8,987,325 and 9,354,075 shares of common stock, respectively, that were not
included in the computation of diluted loss per share.
Reclassifications
Certain
reclassifications of previously reported amounts have been made to conform
to
the current period presentation.
Note
3 - Commitments
Employment
Agreements
The
Company had employment contracts with its two key executives that expired in
August 2007. These employment agreements have not been renewed and no salary
is
being accrued for either of the Company’s executive officers at this time.
Note
4 - Stock Options and Warrants
Stock
Options
A
summary
of the changes in outstanding stock options during the nine months ended
September 30, 2007 follows:
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding,
January 1, 2007
|
|
|
1,562,325
|
|
$
|
0.72
|
|
Granted
|
|
|
-
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
$
|
-
|
|
Expired
|
|
|
(75,000
|
)
|
$
|
0.89
|
|
Outstanding,
September 30, 2007
|
|
|
1,487,325
|
|
$
|
0.71
|
|
Exercisable,
September 30, 2007
|
|
|
1,487,325
|
|
$
|
0.71
|
|
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock
Warrants
A
summary
of the changes in outstanding warrants during the nine months ended September
30, 2007 follows:
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding,
January 1, 2007
|
|
|
7,866,750
|
|
$
|
0.50
|
|
Expired
|
|
|
(366,750
|
)
|
$
|
1.50
|
|
Outstanding,
September 30, 2007
|
|
|
7,500,000
|
|
$
|
0.45
|
|
Note
5 - Preferred Stock
The
Company is authorized to issue up to 10,000,000 shares of preferred stock,
having a $10 par value. The Company has designated 1,000,000 shares as Class
A
convertible and 1,000,000 shares as Class B convertible. At the time of
issuance, the Board of Directors has the right to designate the rights,
preferences and privileges of each class. As of September 30, 2007, the Company
did not have any shares of preferred stock outstanding and has no intention
of
issuing preferred stock at this time.
Note
6 - Transactions With Cantor G&W (Nevada), L.P.
Pursuant
to the Loan Facility and Investment Agreement dated December 8, 2004, between
the Company and Cantor, the Company received $2,000,000, evidenced by a secured
promissory note (the “Note”). The Note matures on December 9, 2009 and bears
interest at the Federal Funds Rate, as in effect and subject to change from
time
to time, plus six percent (10.75% as at September 30, 2007). The Company
received total proceeds of $500,000 and $1,500,000 from the Note in 2005 and
2004, respectively, and recorded an aggregate discount of $1,110,340 for the
fair value of the 13,000,000 warrants issued in connection with the Note. This
discount is amortized over the period of the related debt using the
straight-line method, which approximates the effective interest method.
Amortization of the discount, which is included in interest expense, amounted
to
$166,551 for the nine months ended September 30, 2007 and 2006, respectively.
As
of September 30, 2007, the unamortized debt discount on the Note was $480,788.
Note
7 - Information About Geographical areas
The
Company historically operated in one reportable segment - software licensing.
Revenue information and long lived assets by geographical area is set forth
below for the three months ended September 30, 2007 and 2006:
September
30, 2007
Geographical
area
|
|
Revenues
from
external
customers
|
|
Long-lived
assets
|
|
United
States
|
|
|
-
|
|
$
|
1,084
|
|
United
Kingdom
|
|
|
-
|
|
$
|
802
|
|
Australia
|
|
|
-
|
|
$
|
14,718
|
|
|
|
|
-
|
|
$
|
16,604
|
|
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine
Months Ended September 30, 2006
Geographical
area
|
|
|
Revenues
from
external
customers
|
|
|
Long-lived
assets
|
|
United
States
|
|
|
-
|
|
$
|
26,438
|
|
United
Kingdom
|
|
|
-
|
|
$
|
2,782
|
|
Australia
|
|
$
|
139,777
|
|
$
|
28,735
|
|
|
|
$
|
139,777
|
|
$
|
57,955
|
|
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Item
2. Management’s Discussion and Analysis or Plan of
Operation
Statement
on Forward-Looking Information
Certain
information included herein contains statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, or the Exchange
Act. Such forward-looking information involves important risks and uncertainties
that could significantly affect anticipated results in the future and,
accordingly, such results may differ from those expressed in any forward-looking
statements made herein. These risks and uncertainties include, but are not
limited to, those relating to our ability to locate and merge with a suitable
private company, our ongoing liquidity requirements, and our leverage and debt
service (including sensitivity to fluctuations in interest rates).
Overview
On
January 12, 2004, Gaming & Entertainment Group, Inc., a Nevada corporation
(“G&EG Nevada”) consummated a transaction with NorStar Group, Inc., a
publicly-held company incorporated in Utah that was not conducting or developing
any commercial operations (“NorStar”). In the transaction, NorStar issued
14,600,000 shares of common stock in exchange for all of the outstanding shares
of common stock of G&EG Nevada. Additionally, NorStar changed its name to
Gaming & Entertainment Group, Inc. (“G&EG” or the “Company”). As a
result of the exchange, G&EG Nevada became a subsidiary of G&EG. In May
2005, G&EG Nevada was dissolved.
In
this
report, the references to “we,” “us” or “our” relate to G&EG Nevada prior to
January 12, 2004 and to G&EG and its subsidiaries from that date
forward.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect reported amounts and disclosures, some of which
may
require revision in future periods. The most sensitive estimates affecting
our
financial statements include, or may include in subsequent periods, future
volatility used in valuing equity instruments, allowances for bad debts,
depreciable lives of equipment, amortization periods of intellectual property,
deferred revenues, accrued liabilities and deferred tax valuation allowances.
By
their nature, these judgments are subject to an inherent degree of uncertainty.
Our judgments are based on our historical experience, our observance of industry
trends, information provided by or gathered from our customers and information
available from other outside sources, as appropriate. There can be no assurance
that actual results will not differ from our estimates. The most critical
policies relate to revenue recognition. The following is a description of our
revenues and our revenue recognition policies. The application of these
policies, in some cases, requires our management to make subjective judgments
regarding the effect of matters that are inherently uncertain.
Description
of Revenues
On
December 8, 2004, we entered into definitive agreements with Cantor which
included, among other things, the exclusive license of our Internet gaming
software to them. We are entitled to receive royalty payments from Cantor based
upon a portion of the net win realized by Cantor following repayment of certain
expenses associated therewith. Pursuant to a series of agreements with Cantor
dated February 15, 2006, which includes an amendment to the senior secured
note
issued in favor of Cantor, the royalty payments will be applied on an annual
basis against the outstanding principal and accrued interest under the senior
secured note. To date, we have not received any royalty payments.
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Historically,
we have been involved in the development of Internet gaming systems and games
for third parties, and software for amusement with prizes (“AWP”) and Section 16
gaming machines for the United Kingdom and European gaming markets.
We
have
decided to terminate our gaming initiatives in the United Kingdom due to failure
to obtain sales by and through our third party manufacturer and distributor.
Many factors led to this decision, including the U.K. Gambling Act 2005, which
came into operation on September 1, 2007, which has had a major negative impact
on the arcade marketing the U.K. Specifically, Section 16 machines were replaced
by Category B3 machines. Feedback from operators shows that the player base
has
responded negatively to the new B3 format which is limited to a £1 stake.
Further, a prohibition on smoking in enclosed public establishments, including
arcades, and a limitation on the number of B3 gaming machines allowed in such
establishments, has contributed to the significant decline in machine
revenues, and the consequent lack of demand for new machines in the marketplace.
For the foregoing reasons, we have terminated our U.K. gaming
initiatives.
Revenue
Recognition
Royalty
payments received from Cantor will be applied against the outstanding principal
and accrued interest under the senior secured note issued in favor of Cantor.
Results
of Operations
Comparison
of Three Months Ended September 30, 2007 and 2006
Revenues
During
the three months ended September 30, 2007 and September 30, 2006, respectively,
we generated no revenues.
Cost
of Revenues
During
the three months ended September 30, 2007 and September 30, 2006, respectively,
we had no cost of revenues.
We
did
not realize a gross profit during the three months ended September 30, 2007
and
September 30, 2006.
Operating
Expenses
During
the three months ended September 30, 2007, we incurred total operating expenses
of $57,220, as compared to $206,394 during the three months ended September
30,
2006, a decrease of $149,174, or 72.3%.
During
the three months ended September 30, 2007, we incurred no research and
development expenses, as compared to $56,223 during the three months ended
September 30, 2006, a decrease of $56,223, or 100%. The decrease in our
research and development expenses was due primarily to the sale of our Internet
gaming platform to Cantor on February 15, 2006.
During
the three months ended September 30, 2007, we incurred selling, general and
administrative expenses of $57,220, as compared to $150,171 during the three
months ended September 30, 2006, a decrease of $92,951, or 61.9%. The decrease
in our selling, general and administrative expenses was due primarily to
focusing on the development of AWP and Section 16 games and substantially
decreasing many expenses incurred in the prior fiscal year.
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other
Income (Expense)
For
the
three months ended September 30, 2007, other expense was $100,567, compared
to
other expense of $110,623 for the three months ended September 30, 2006, a
decrease of other expense of $10,056, or 9.1%. The decrease is related primarily
to $54,603 of interest expense incurred in connection with the issuance of
the
senior secured note payable and $55,517 amortization of associated debt
discount, offset in part, by $9,553 of other income.
Net
Loss
For
the
three months ended September 30, 2007, we experienced a net loss of $157,787,
compared to a net loss of $317,017 for the three months ended September 30,
2006, a decrease of $159,230, or 50.2%. The decrease in the net loss is
principally attributable to a $149,174 decrease in operating expenses and a
$10,056 decrease in other expense.
Comparison
of Nine Months Ended September 30, 2007 and 2006
Revenues
During
the nine months ended September 30, 2007, we generated no revenues, as compared
to revenues from the development of the Cantor Internet gaming site (“Cantor
Casino”), totaling $139,777, during the nine months ended September 30, 2006.
The $139,777, or 100%, decrease in revenues related to the sale of our Internet
gaming platform to Cantor on February 15, 2006.
Cost
of Revenues
During
the nine months ended September 30, 2007, we had no cost of revenues, compared
to $73,935 during the nine months ended September 30, 2006. The $73,935, or
100%, decrease in the cost of revenues was directly attributable to the sale
of
our Internet gaming platform to Cantor on February 15, 2006.
We
realized no gross profit during the nine months ended September 30, 2007,
compared to gross profit of $65,842 during the nine months ended September
30,
2006. The $65,842 or 100%, decrease in gross profit related primarily to the
cessation of Internet gaming development due to the sale of our Internet gaming
system and other assets to Cantor in 2006.
Operating
Expenses
During
the nine months ended September 30, 2007, we incurred total operating expenses
of $291,415, as compared to $744,716 during the nine months ended September
30,
2006, a decrease of $453,301, or 60.9%.
During
the nine months ended September 30, 2007, we incurred no research and
development expenses, as compared to $150,241 during the nine months ended
September 30, 2006, a decrease of $150,241, or 100%. The decrease in our
research and development expenses was due primarily to the sale of our Internet
gaming platform to Cantor on February 15, 2006.
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During
the nine months ended September 30, 2007, we incurred selling, general and
administrative expenses of $291,415, as compared to $594,475 during the nine
months ended September 30, 2006, a decrease of $303,060, or 51.0%. The decrease
in our selling, general and administrative expenses was due primarily to
focusing on the development of AWP and Section 16 games and substantially
decreasing many expenses incurred in the prior fiscal year.
Other
Income (Expense)
For
the
nine months ended September 30, 2007, other expense was $313,067, compared
to
other expense of $101,731 for the nine months ended September 30, 2006, an
increase of other expense of $211,336, or 207.7%. The increase is related
primarily to $164,945 of interest expense incurred in connection with the
issuance of the senior secured note payable and $166,551 amortization of
associated debt discount, offset in part, by $18,429 of other income.
Net
Loss
For
the
nine months ended September 30, 2007, we experienced a net loss of $604,482,
compared to a net loss of $780,605 for the nine months ended September 30,
2006,
a decrease of $176,123, or 22.6%. The decrease in the net loss is directly
attributable to a $453,301 reduction in operating expenses, offset, in part,
by
a $65,842 decrease in gross profit and a $211,336 increase in other
expense.
Liquidity
and Capital Resources
Overview
As
of
September 30, 2007, we had cash of $14,050 and total liabilities of $2,939,718,
of which $1,420,506 are current liabilities. Accordingly, as of September 30,
2007, we had a working capital deficiency of $1,406,456 and a stockholders’
deficiency of $2,909,064. During the nine months ended September 30, 2007,
cash
on hand decreased by $59,317, from $73,367 to $14,050. The decrease in cash
reflected $60,703 of net cash used in operating activities and the $1,386 effect
of exchange rate changes on cash.
Operating
activities used net cash of $60,703 during the nine months ended September
30,
2007, whereas operating activities used net cash of $402,037 during the nine
months ended September 30, 2006. The net cash used in operating activities
during the nine months ended September 30, 2007 related primarily to our net
loss of $604,482, a decrease in accounts payable in the amount of $7,727,
offset, in part, by an increase in accrued expenses of $160,457, an increase
in
accrued compensation - officers of $208,009 and amortization of debt discount
of
$166,551. During the nine months ended September 30, 2006, our operating
activities used net cash of $402,037, reflecting our net loss $780,605, a gain
on sale of assets of $204,736, a decrease in accounts payable of $84,028,
offset, in part, by a decrease in accounts receivable of $91,580, amortization
of debt discount of $166,551, an increase in accrued expenses of $141,396,
and
an increase in accrued compensation - officers of $230,309.
We
had no
investing activities during the nine months ended September 30, 2007, compared
to $518,722 provided during the nine months ended September 30, 2006. The
increase in cash provided by investing activities during the nine months ended
September 30, 2006 reflects the sale of certain intangible assets consisting
of
source code and graphics relating to our Internet gaming software.
GAMING
& ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We
had no
financing activities during the nine months ended September 30, 2007, compared
to $55,548 of net cash used in financing activities during the nine months
ended
September 30, 2006. The net cash used in our financing activities during the
nine months ended September 30, 2006 relates to the payment of all outstanding
principal and accrued interest under the promissory notes in favor of Tibor
N.
Vertes and Gregory L. Hrncir, our Chief Executive Officer and President,
respectively.
Outlook
We
incurred losses of $604,482 and $780,605 and negative net cash flows from
operating activities of $60,703 and $402,037, for the nine months ended
September 30, 2007 and 2006, respectively. As of September 30, 2007, we had
an
accumulated deficit of $10,039,100. The foregoing raises substantial doubt
about
our ability to continue as a going concern.
At
this
time, management of the Company is exploring opportunities relating to merging
with an operating entity given the cessation of the Company’s gaming operations.
There can be no assurance that we will be successful in this endeavor, and
given
our current cash position, if we are not successful we will be forced to
terminate our operations.
Risk
Factors
We
are
subject to a high degree of risk as we are considered to be in unsound financial
condition. The following risks, if any one or more occurs, could materially
harm
our business, financial condition or future results of operations, and the
trading price of our common stock could further decline. These risks factors
include, but are not limited to, our extremely limited cash on hand, the
inability to enter into a merger agreement and consummate a merger with an
operating entity, the significant dilution which would occur if the Company
is
successful in consummating a merger with a third party, the control of our
common stock by our management, the classification of our common stock as “penny
stock,” the absence of any right to dividends, and the unpredictability and lack
of volume in trading of our common stock.
For
a
more detailed discussion as to the risks related to Gaming & Entertainment
Group, Inc., our industry and our common stock, please see the section entitled,
“Management’s Discussion and Analysis or Plan of Operation - Risk Factors,” in
our Annual Report on Form 10-KSB, as filed with the Securities and Exchange
Commission on March 23, 2007.