<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 March 31, 1999
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 [X] NO [_]
The number of shares of common stock, $.00001 par value outstanding as of May 6,
1999 was 8,531,819.
<PAGE>
Virtual Gaming Technologies, Inc.
Table of contents for form 10-QSB
Quarter Ended March 31, 1999
Page
Number
PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements
. Consolidated Balance Sheets as of March 31, 1999 (unaudited) 3
and December 31, 1998
. Consolidated Statements of Operations (unaudited) for three 5
months ended March 31, 1999 and 1998
. Consolidated Statements of Cash Flows (unaudited) for three 6
months ended March 31, 1999 and 1998
. Notes to consolidated financial statements (unaudited) 8
ITEM 2. Management's Discussion and Analysis or Plan of Operations 10
PART 2 OTHER INFORMATION 12
2
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
ASSETS
------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 166,767 $ 523,512
Restricted cash 300,000 300,000
Prepaid expenses and other assets 34,224 32,740
---------- ----------
Total current assets 500,991 856,252
Gaming license 28,767 53,151
Deposits 144,820 94,820
Equipment, net 436,865 449,059
---------- ----------
Total assets $1,111,443 $1,453,282
========== ==========
</TABLE>
3
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 142,887 $ 209,895
Accrued expenses 109,284 120,947
Funds held on deposit 56,003 25,968
Current portion of capital lease obligation 12,140 11,519
Notes payable 541,270 150,000
------------- ------------
Total current liabilities 861,584 518,329
Long-Term Portion of Capital Lease Obligation 4,648 7,928
------------- ------------
Total liabilites 866,232 526,257
------------- ------------
Shareholders' Equity
Preferred stock, $.0001 par value, 10,000,000 shares
authorized, none issued or outstanding - -
Common stock, $.00001 par value; 30,000,000 and
30,000,000 shares authorized in 1999 and 1998,
respectively; 8,349,696 and 8,331,196 issued in 1999
and 1998, respectively; 116,667 and 116,667 issuable
in 1999 and 1998, respectively 85 85
Additional paid-in capital 11,089,009 11,079,550
Accumulated Deficit (10,843,883) (10,152,610)
------------- ------------
Total shareholders' equity 245,211 927,025
------------ ------------
Total liabilities and shareholders' equity $ 1,111,443 $ 1,453,282
============= ============
</TABLE>
4
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenue:
Casino Revenue $ 111,849 $ 37,583
Less promotional discounts (14,704) (20,002)
---------- -----------
Net Gaming Revenue 97,145 17,581
---------- -----------
Operating Expenses:
Salaries and payroll expenses 358,650 379,797
Other operating expenses 418,764 611,449
---------- -----------
Total operating expenses 777,414 991,246
---------- -----------
Loss from Operations (680,269) (973,665)
Financial income (expense):
Interest income 1,159 1,497
Interest expense (8,156) (4,714)
Loss on sale of securities available for sale - (1,103)
Unrealized foreign currency loss (1,172) -
---------- -----------
Total financial income (expense) (8,169) (4,320)
---------- -----------
Loss before income taxes (688,438) (977,985)
Income tax expense 2,835 200
---------- -----------
Net Loss $ (691,273) $ (978,185)
========== ===========
Basic and diluted net loss per share $ (.08) $ (.14)
========== ===========
Shares used to compute basic and diluted net loss per share 8,524,229 7,107,782
========== ===========
</TABLE>
5
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(691,273) $(978,185)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 31,199 24,664
Loss on sale of securities available for sale - 1,103
Issuance of common stock options and warrants
for licensing and consulting fees and compensation 6,704 248,297
Changes in operating assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other current assets (1,484) 9,322
Gaming license 24,384 25,000
Increase (decrease) in:
Accounts payable and accrued expenses (78,671) 81,971
Funds held on deposit 30,035 8,653
--------- ---------
Net cash flows used in
operating activities (679,106) (579,175)
--------- ---------
Cash Flows from Investing Activities:
Increase in deposits (50,000) (898)
Purchase of equipment (19,005) (14,416)
Proceeds from the sale of investments - 53,967
--------- ---------
Net cash flows used in
investing activities (69,005) 38,653
--------- ---------
</TABLE>
6
<PAGE>
VIRTUAL GAMING TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from sale of common stock 2,755 437,053
Proceeds from loans from stockholder 400,000 -
Principal payments under notes payable (8,730) -
Principal payments under capital lease (2,659) (3,078)
--------- ---------
Net cash flows provided by
financing activities 391,366 433,975
--------- ---------
Net increase (decrease) in cash and cash equivalents (356,745) (106,547)
Cash and cash equivalents at beginning of year 523,512 290,991
--------- ---------
Cash and cash equivalents at March 31 $ 166,767 $ 184,444
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest $ 8,177 $ 964
Income taxes $ 2,810 $ -
========= =========
Supplemental disclosure of noncash investing and financing activities:
Unrealized gain on securities available for sale $ - $ (120)
========= =========
Unrealized foreign exchange loss $ (1,172) $ -
========= =========
</TABLE>
7
<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 Form 10-KSB for 1998. 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 of 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
- -----------------
Between January 1998 and December 1998, the Company conducted a private
placement of 1,400,000 shares of Common Stock, at a price of $3.00 per share,
pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold
1,399,905 shares of Common Stock for the gross proceeds of $4,199,715.
In March 1999, the Company started a private placement of 700,000 shares of
Common Stock, at a price of $3.00 per share, pursuant to Rule 506 under the 1933
Act. At the time of this 10-QSB Report 18,500 shares have been sold for the
gross proceeds of $55,500.
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.
8
<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 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.
9
<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
May 6, 1999, the Company has conducted limited marketing of its Internet gaming
operations and, consequently, from the inception of gaming operations in
September 1997 through May 6, 1999, the Company generated only $442,796 of gross
revenue from gaming operations. As of May 6, 1999, the Company had accepted
33,479 subscriptions for its Internet gaming operations and has had 979 active
players. As of the same date, cash deposits made by customers, which are used by
customers for wagering, from inception of gaming operations totaled
approximately $722,041.
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. Between January
1998 and December 1998, the Company conducted a private placement of 1,400,000
shares of Common Stock, at a price of $3.00 per share, pursuant to Rule 506
under the 1933 Act. In that offering, the Company sold 1,399,905 shares of
Common Stock for the gross proceeds of $4,199,715.
In March 1999, the Company started a private placement of 700,000 shares of
Common Stock, at a price of $3.00 per share, pursuant to Rule 506 under the 1933
Act. At the time of this 10-QSB Report 18,500 shares have been sold for the
gross proceeds of $55,500.
As of March 31, 1999, the Company had a negative working capital of $360,593 and
stockholders' equity of $245,211. The Company's plan of operations over the next
12 months includes release of next generation software due in July 1999 that
will be entirely Web based and will not require any manual download or
installation. The embedded software will work in the most popular Web browsers
of today, Internet Explorer and Netscape Navigator. It will be using highly
compressed streaming technology, where users will experience a responsive
application that feels as if it was installed on their local hard drive. The
system will have scalability, replica-ability and will be a real time multi
lingual application that can be deployed on any Internet Provider with minimal
support.
Comparison of operations to prior year quarter
- -----------------------------------------------
The Company's casino revenue increased 198% to $111,849 for the three months
ended March 31, 1999 compared to $37,583 for the three months ended March 31,
1998. The growth was due to additional revenues generated from gaming
operations. Promotional discounts decreased by 26% to $14,704 for the quarter
ended March 31, 1999 from $20,002 for the three months ended March 31, 1998.
Operating expenses decreased by 22% to $777,414 for the three months ended March
31, 1999 from $991,246 for the prior year quarter. The decrease in these
expenses was primarily due to prior quarter's higher charges for stock options
pursuant to APB No.25.
Interest expense increased to $8,156 for the three months ended March 31, 1999
from $4,714 for the three months ended March 31, 1998. The increase was mainly
resulted from interest cost due to notes payable.
Net loss from operations for the three months ended March 31, 1999 was $691,273
compared to net loss of $978,185 for the previous quarter. The reduction in loss
from operations was mainly the result of increase in revenues and less stock
option expenses compared to the prior quarter.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1999, the Company had $166,767 in cash and cash equivalents
compared to $523,512 at December 31, 1998. Working capital at March 31, 1999 was
reduced by $698,516 to negative working capital of $360,593 from $337,923 on
December 31, 1998. The decrease was the result of the loss incurred in the
quarter.
10
<PAGE>
The Company believes that it will require, at least, an additional $2,100,000 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, 1998 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.
Impact of the Year 2000
- -----------------------
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 who has performed an
audit to assess the scope of the Company's risks and bring its applications into
compliance. The Committee has completed its identification of applications that
are not Year 2000 compliant, if any. In addition, the Company has asked 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 does not separately track the internal costs incurred for the Year
2000 project, such costs are principally the related payroll costs for its
information systems group. The Company's external expenditure to date in
complying with the Year 2000 audit has been less than $10,000 and believes
$5,000 will be needed to complete the Year 2000 compliance. However, no
assurance can be given that all of the Company's 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.
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 Report on Form 10-KSB, 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 year 1998; 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 on 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Inapplicable.
11
<PAGE>
Item 2. Changes in Securities.
----------------------
Inapplicable.
Item 3. Defaults Upon Senior Securities.
--------------------------------
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Inapplicable.
Item 5. Other Information.
------------------
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
Pursuant to Form 8-K/A filed on January 6, 1999, the
Registrant, upon the approval of the audit committee of the Board of Directors
of the Registrant, approved the appointment of Pannell Kerr Forster
International as the Registrant's independent auditors for the fiscal year ended
December 31, 1998. The Company's independent auditors for the fiscal years ended
December 31,1997 and 1996 were McGladrey & Pullen LLP.
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: May 11,1999 /s/ BRUCE MERATI
----------------------------
Bruce Merati
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 166,767
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 34,353
<INVENTORY> 0
<CURRENT-ASSETS> 500,991
<PP&E> 436,865
<DEPRECIATION> 172,237
<TOTAL-ASSETS> 1,111,443
<CURRENT-LIABILITIES> 861,584
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 245,126
<TOTAL-LIABILITY-AND-EQUITY> 1,111,443
<SALES> 111,849
<TOTAL-REVENUES> 111,849
<CGS> 14,704
<TOTAL-COSTS> 14,704
<OTHER-EXPENSES> 777,414
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,156
<INCOME-PRETAX> (688,438)
<INCOME-TAX> 2,835
<INCOME-CONTINUING> (691,273)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (691,273)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
