<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Virtual Gaming Technologies, Inc.
---------------------------------
(Name of Small Business Issuer in its charter)
Delaware 33-0716247
- - ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12625 High Bluff Drive
Suite 205A
San Diego, California 92130-2053
- - ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 619-259-5015
------------
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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 [_] NO [X]
The number of shares of common stock, $.00001 par value outstanding as of
October 31, 1998 was 8,366,558.
<PAGE>
Virtual Gaming Technologies, Inc.
Table of Contents for Form 10-QSB
Quarter Ended September 30, 1998
Page
Number
PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements
. Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 3
. Consolidated Statements of Operations (unaudited) for nine
months ended September 30, 1998 and 1997 and three months
ended September 30, 1998 and 1997 4
. Consolidated Statements of Cash Flows (unaudited) for nine
months ended September 30, 1998 and 1997 6
. Notes to consolidated financial statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis or Plan of
operations 9
PART 2 - OTHER INFORMATION 11
2
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
(Unaudited) (Audited)
- - ---------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,016,485 $ 290,991
Restricted cash 300,000 -
Securities available for sale - 55,190
Prepaid expenses and other assets 78,484 34,112
Gaming license, net 79,224 54,167
----------------------------------
Total current assets 1,474,193 434,460
----------------------------------
Equipment, net 461,595 313,113
----------------------------------
Deposits 94,821 13,745
----------------------------------
$ 2,030,609 $ 761,318
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 449,715 $ 85,658
Funds held on deposit 25,653 5,588
Current portion of capital lease obligation 10,929 9,334
Note payable 150,000 150,000
---------------------------------
Total current liabilities 636,297 250,580
----------------------------------
Long-Term Portion of Capital Lease Obligation 11,036 19,447
----------------------------------
Stockholders' Equity
Common stock, $.00001 par value; authorized 30,000,000
shares; number issuable and number issued and
outstanding: September 1998: 0 and 8,368,192 shares;
1997: 116,667 and 6,931,291 shares, respectively 85 70
Additional paid-in capital 10,858,329 6,651,558
Unrealized gain on securities available for sale - 120
Accumulated Deficit (9,475,138) (6,160,457)
----------------------------------
1,383,276 491,291
----------------------------------
$ 2,030,609 $ 761,318
==================================
</TABLE>
3
<PAGE>
Virtual Gaming Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
--------------------------------- ------------------------------------
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Casino Revenue $ 182,392 $ 142 $ 82,628 $ 142
Less promotional discounts 28,605 - 6,453 -
-----------------------------------------------------------------------
Net Gaming Revenue 153,787 142 76,175 142
-----------------------------------------------------------------------
Operating Expenses:
Operating expenses 3,466,224 3,189,416 1,309,445 1,181,161
Settlement expense - - - -
-----------------------------------------------------------------------
3,466,224 3,189,416 1,309,445 1,181,161
-----------------------------------------------------------------------
(Loss) from Operations (3,312,437) (3,189,274) (1,233,270) (1,181,019)
Financial income (expense):
Interest income 15,842 12,452 9,713 7,397
Interest expense (15,358) (11,248) (4,999) (11,242)
Loss on sale of securities (1,508) - (405) -
-----------------------------------------------------------------------
(1,024) 1,204 4,309 (3,845)
-----------------------------------------------------------------------
Net (loss) before
income taxes (3,313,461) (3,188,070) (1,228,961) (1,184,864)
Tax expense 1,220 1,806 - 66
-----------------------------------------------------------------------
Net (loss) $(3,314,681) $(3,189,876) $(1,228,961) $(1,184,930)
=======================================================================
Basic and diluted loss per share $ (0.44) $ (0.55) $ (0.15) $ (0.20)
=======================================================================
Weighted average common
shares outstanding 7,607,444 5,793,019 8,121,327 5,881,643
=======================================================================
</TABLE>
4
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VIRTUAL GAMING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September
-----------------------------------
1998 1997
(Unaudited) (Unaudited)
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) $(3,314,681) $(3,189,876)
Adjustment to reconcile net (loss) to operating activities:
Settlement expense
Depreciation and amortization 68,794 20,721
Loss on sale of securities available for sale 1,103 -
Compensation related to the conversion of
stockholder note payable - -
Issuance of common stock options and warrants
for licensing and consulting fees and compensation 403,762 1,435,351
Changes in assets and working capital components:
(Increase) decrease in:
Prepaid expenses (44,372) (44,994)
Restricted Cash (300,000) -
Gaming license (25,057) (79,167)
Increase (decrease) in:
Accounts payable and accrued expenses 364,057 28,890
Funds held on deposit 20,065 -
Net cash (used in) operating activities (2,826,329) (1,829,075)
Cash Flows from Investing Activities
Increase in deposits (81,076) (3,880)
Purchase of equipment (217,276) (222,339)
Purchase of investments available for sale - -
Proceeds from the sale of investments 53,967 -
Net cash provided by (used in) investing activities (244,385) (226,219)
</TABLE>
5
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Nine Months Ended September
-------------------------------
1998 1997
(Unaudited) (Unaudited)
- - ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Financing Activities
Net proceeds from sale of common stock 3,803,024 2,728,993
Conversion of stockholder note to common stock - (128,680)
Capital lease (6,816) 30,342
-------------------------------
Net cash provided by financing activities 3,796,208 2,630,655
-------------------------------
Net increase (decrease)
in cash and cash equivalents 725,494 575,361
Cash and cash equivalents at beginning of year 290,991 468,301
-------------------------------
Cash and cash equivalents at end of year $1,016,485 $1,043,662
================================
Supplemental Disclosures of Cash
Flow Information
Cash payments for:
Interest $ 4,108 $ 11,246
Income taxes $ 1,220 $ 1,350
Supplemental Schedule of Noncash
Investing and Financing Activities
Capital lease obligation incurred for equipment $ - $ 33,340
Unrealized gain on securities $ (120) $ -
- - -------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ------------------------------------------
Basis of Presentation
- - ---------------------
These condensed consolidated financial statements of Virtual Gaming
Technologies, Inc. (the "Company") do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements and notes thereto included in the Company's Registration Statement of
Form 10-SB. In the opinion of management, the financial information set forth
in the accompanying condensed consolidated financial statements reflect all
adjustments necessary for a fair statement of the periods reported, and all such
adjustments were of a normal and recurring nature. Interim results are not
necessarily indicative of results for a full year.
General
- - -------
The Company has derived all its revenues from Internet casino-style gaming,
including baccarat, blackjack and video poker, and a pari-mutuel sports betting
service. The Company's internally developed proprietary software applications
allow for interactive gaming, including simulated casino motion and sound, on a
real-time basis. The Company offers its gaming operations in several languages
in certain international jurisdictions located in Asia, the Caribbean, Latin
America, the Middle East, Australia, Europe and Africa. The Company's gaming
operations are conducted by its wholly-owned subsidiary, Virtual Gaming
Technologies (Antigua) Ltd., pursuant to a non-exclusive license from the
Company and supported by a server site and hardware located in St. Johns,
Antigua, West Indies.
The Company's policy is to accept subscriptions only from persons over the age
of 21 and believed to reside in jurisdictions that are not known to expressly
prohibit Internet gaming. Subscriptions will not be accepted from persons
believed to be citizens or residents of the United States.
Private Placement
- - -----------------
In January 1998, the Company commenced a private placement of shares of Common
Stock, at a price of $3.00 per share. As of September 30, 1998, the Company had
sold 1,320,571 shares of common stock for the gross proceeds of $3,961,713. The
placement is being conducted pursuant to rule 506 under the Securities Act of
1933.
Authorized Share Capital
- - ------------------------
On October 29, 1998, the Corporation increased its authorized common stock to
30,000,000 shares with $.00001 par value per share and provided for 10,000,000
shares of preferred stock with $.00001 par value per share. On said date, a
Certificate of Amendment of Certificate of Incorporation of the Corporation (the
"Amendment") was filed with the Delaware Secretary of State for the purpose of
effecting the above-referenced changes. The Amendment was approved by a majority
of the outstanding shares of common stock entitled to vote of the Corporation
Pursuant to Written Consent of the Majority Stockholders effective as of
September 29, 1998.
Use of estimates
- - ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
7
<PAGE>
Revenue recognition
- - -------------------
Gaming revenue is the net win from gaming activities, which is the difference
between gaming wins and losses. In September 1997, the Company commenced limited
operations with live gaming activity, initially offering video poker and
blackjack to its customers. In the first quarter of 1998, the Company introduced
video baccarat, and in the second quarter of 1998 introduced an Internet based
pari-mutuel sports-betting service.
Loss per common share
- - ---------------------
Basic loss per common share has been computed on the basis of the weighted-
average number of common shares outstanding and issuable under antidilution
provisions during each period presented. Diluted per-share amounts assume the
conversion of potential common stock, such as options and warrants. The common
shares issuable upon exercise of employee stock options and stock warrants have
not been included in the computation of diluted loss per common share because
their inclusion would have had an antidilutive effect.
Software development costs and recently issued accounting pronouncements
- - -------------------------------------------------------------------------
Software development costs for internal use software are expensed as incurred.
The American Institute of Certified Public Accountants issued Statement of
Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or
Obtained for Internal Use" in March 1998. SOP 98-1 is not expected to have a
material impact on the Company's financial statements.
Regulation risk
- - ---------------
The Company intends to provide its services in jurisdictions that do not
prohibit gaming over the Internet. There can be no assurance that the Company
will be able to comply with future government regulations that will affect
gaming operations in a significant number of international jurisdictions. The
United States has laws prohibiting gaming operations except by licensed persons.
Currently, the effect of these laws on Internet gaming is uncertain. As a
result, the Company does not intend to accept subscribers from the United
States.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- - ---------------------------------------------------------------------
Plan of Operations
- - ------------------
The Company is engaged in the business of offering gaming opportunities over the
Internet. In September 1997, the Company commenced offering Casino style gaming
opportunities over the Internet, including baccarat, blackjack and video poker,
and in April 1998 commenced offering a pari-mutuel sports betting service. As
of October 31, 1998, the Company has conducted limited marketing of its Internet
gaming operations and, consequently, from the inception of gaming operations in
September 1997 through October 31, 1998, the Company generated only $119,764 of
gross revenue from gaming operations. As of October 31, 1998, the Company had
accepted 14,225 subscriptions for its Internet gaming operations and as of the
same date cash deposits made by customers, which are used by customers for
wagering, from inception of gaming operations totaled approximately $358,877.
The Company has financed its activities to date through the sale of its
securities. In January 1998, the Company commenced a private placement of
1,400,000 shares of Common Stock, at a price of $3.00 per share. The offering
is being conducted by management of the Company on a straight best efforts
basis, which means that there is no minimum offering amount or escrow of
proceeds and there is no commitments on the part of third parties to subscribe
or arrange for others to subscribe for the purchase of the offered shares. As
of October 31, 1998, the Company had sold 1,320,571 shares of Common Stock for
the gross proceeds of $3,961,713.
As of September 30, 1998, the Company had a working capital of $837,896 and
stockholders' equity of $1,383,276. The Company's plan of operations over the
next 12 months includes the full scale roll-out of its casino style gaming
operations and sportsbook over the Internet through the introduction of a multi-
tiered marketing plan intended to target potential customers based on their
historical gambling patterns. In addition to its working capital on hand as of
October 31, 1998, the Company believes that it will require, at least, an
additional $1,400,000 of capital over the next 12 months in order to fund the
full scale roll-out of its Internet gaming operations and to finance the
continuing losses from operations as the Company endeavors to build revenue and
reach profitable operations.
There can be no assurance that the Company will be able to obtain sufficient
additional capital, either through the present private placement or otherwise,
in order to fund the Company's working capital requirements in a timely manner.
The report of the Company's independent accountants for the fiscal year ended
December 31, 1997 states that due to recurring losses from operations, the
absence of significant operating revenues and the Company's limited capital
resources, there is substantial doubt about the Company's ability to continue as
a going concern.
Year 2000 Compliance
- - --------------------
The Company utilizes computer software programs and operating systems, including
applications used in operating the gaming services, the Company's proprietary
software, network access, and various administrative and billing functions. To
the extent the Company's software applications contain source codes that are
unable to appropriately interpret the upcoming calendar year 2000, some level of
modification, or even possibly replacement of such applications, may be
necessary. The Company has appointed a Year 2000 Committee to perform an audit
to assess the scope of the Company's risks and bring its applications into
compliance. The Committee is currently in the process of completing its
identification of applications that are not Year 2000 compliant, if any. In
addition, the Company has begun to ask its vendors about their progress in
identifying and addressing problems that their computer systems may face in
correctly processing date information related to the Year 2000.
The Company is in the early stages of conducting its Year 2000 audit and
therefore is unable to make a reasonable estimate of the costs associated with
Year 2000 compliance. Accordingly, no assurance can be given that any or all of
the Company's or third party systems are or will be Year 2000 compliant or that
the costs required to address the Year 2000 issue or that the impact of the
Company's failure to achieve substantial Year 2000 compliance will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
9
<PAGE>
Forward Looking Statements
- - --------------------------
This Quarterly Report contains forward-looking statements that are based on the
Company's beliefs as well as assumptions made by and information currently
available to the Company. When used in this Quarterly Report, the words
"believe," "endeavor," "expect," "anticipate," "estimate," "intends," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks, uncertainties and assumptions described
in the Company's Registration Statement on Form 10-SB, including, without
limitation, the Company's recent commencement of commercial operations; the
absence of commercial acceptance of the Company's services and products by its
potential customers; the absence of meaningful revenues as of the date of this
registration statement; the Company's present financial condition and the risks
and the availability of additional capital as and when required; the going
concern opinion included in the report of the Company's independent accountants
for the Company's fiscal 1997 financial statements; the risks and uncertainties
of regulation of Internet gaming by the international community; the risks and
uncertainties concerning technological changes; increased competition; and
general economic conditions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, or projected. The
Company cautions potential investors not to place undue reliance on any such
forward-looking statements all of which speak only as of the date made.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Inapplicable.
Item 2. Changes in Securities.
---------------------
On October 29, 1998, the Corporation increased its authorized
common stock to 30,000,000 shares with $.00001 par value per share and provided
for 10,000,000 shares of preferred stock with $.00001 par value per share. On
said date, a Certificate of Amendment of Certificate of Incorporation of the
Corporation (the "Amendment") was filed with the Delaware Secretary of State for
the purpose of effecting the above-referenced changes. The Amendment was
approved by a majority of the outstanding shares of common stock entitled to
vote of the Corporation Pursuant to Written Consent of the Majority Stockholders
effective as of September 29, 1998.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
See Item 2 above.
Item 5. Other Information.
-----------------
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
Exhibit 27.
(b) Reports on Form 8-K
-------------------
Inapplicable.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Virtual Gaming Technologies, Inc.
(Registrant)
Date: November 13, 1998 /s/ BRUCE MERATI
-----------------------------
Bruce Merati
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,016,485
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 34,353
<INVENTORY> 0
<CURRENT-ASSETS> 1,474,193
<PP&E> 461,595
<DEPRECIATION> 110,693
<TOTAL-ASSETS> 2,030,609
<CURRENT-LIABILITIES> 636,297
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 1,383,276
<TOTAL-LIABILITY-AND-EQUITY> 2,030,609
<SALES> 182,392
<TOTAL-REVENUES> 182,392
<CGS> 28,605
<TOTAL-COSTS> 28,605
<OTHER-EXPENSES> 3,466,224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,358
<INCOME-PRETAX> (3,313,461)
<INCOME-TAX> 1,220
<INCOME-CONTINUING> (3,314,681)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,314,681)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
