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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 June 30, 2000
Commission File No. 0-29800
Virtgame.com Corp.
-------------------
(Name of Small Business Issuer in its charter)
<TABLE>
<S> <C> <C>
Delaware 33-0716247
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(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
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code 858-259-5015
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Virtual Gaming Technologies, Inc.
---------------------------------
(former name)
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 June
30, 2000 was 12,250,293.
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Virtgame.com Corp.
Table of contents for Form 10-QSB
Quarter Ended June 30, 2000
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<CAPTION>
Page
Number
PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements
<S> <C>
. Consolidated Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 3
(unaudited)
. Consolidated Statements of Operations (unaudited) for six months and three months ended 5
June 30, 2000 and 1999
. Consolidated Statements of Cash Flows (unaudited) for six months ended June 30, 2000 and 6
1999
. Notes to Consolidated Financial Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis or Plan of Operations 9
PART 2 - OTHER INFORMATION 11
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2
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VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
ASSETS
------
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<CAPTION>
June 30, December 31,
<S> <C> <C>
2000 1999
(Unaudited) (Unaudited)
----------------------------- ----------------------------
Current Assets:
Cash and cash equivalents $ 46,632 $ 422,309
Restricted cash 150,000 150,000
Prepaid expenses and other assets 16,992 19,924
Net assets of discontinued operations 3,988 201,359
----------------------------- ----------------------------
Total current assets 217,612 793,592
----------------------------- ----------------------------
Noncurrent assets:
Deposits 9,727 8,513
Equipment, net 1,195,172 1,180,068
----------------------------- ----------------------------
Total noncurrent assets 1,204,899 1,188,581
----------------------------- ----------------------------
Total assets $ 1,422,511 $ 1,982,173
============================= ============================
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3
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VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
<S> <C> <C> <C> <C>
2000 1999
(Unaudited) (Unaudited)
-------------------------- -------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 328,144 $ 260,133
Current portion of capital lease obligation 4,915 -
Notes payable 201,090 198,876
-------------------------- -------------------------
Total current liabilities 534,149 459,009
Long Term Liabilities 12,077 -
Total liabilities 546,226 459,009
-------------------------- -------------------------
Shareholders' Equity
Preferred stock, $.0001 par value, 10,000,000 shares
authorized, none issued or outstanding - -
Common stock, $.00001 par value; 30,000,000 shares
authorized; 12,250,293 and 10,369,292 shares issued
and outstanding in 2000 and 1999, respectively;
1,017,001and 144,334 issuable in 2000 and 1999,
respectively 122 105
Additional paid-in capital 15,382,870 14,726,388
Accumulated Deficit (14,506,707) (13,203,329)
-------------------------- -------------------------
Total shareholders' equity 876,285 1,523,164
-------------------------- -------------------------
Total liabilities and shareholders' equity $ 1,422,511 $ 1,982,173
========================== =========================
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4
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VIRTGAME.COM CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six and Three Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues: $ 29,000 $ - $ 29,000 $ -
Operating Expenses:
Salaries and payroll expenses 536,474 530,324 235,666 269,063
Other operating expenses 525,084 548,115 225,141 283,630
-------------------- ------------------- -------------------- -------------------
Total expenses from continuing
operations before income taxes 1,061,558 1,078,439 460,807 552,693
-------------------- ------------------- -------------------- -------------------
Loss from continuing operations (1,032,558) (1,078,439) (431,807) (552,693)
Financial income (expense):
Interest income 1,408 1,131 84 196
Interest expense (12,435) (19,005) (6,566) (11,833)
Other income 2,778 - 2,778 -
Loss on sale of fixed assets (1,003) - (1,003) -
-------------------- ------------------- -------------------- -------------------
Total financial income (expense) (9,252) (17,874) (4,707) (11,637)
-------------------- ------------------- -------------------- -------------------
Loss from continuing operations
before income taxes (1,041,810) (1,096,313) (436,514) (564,330)
Income tax expense 4,244 2,862 1,241 27
-------------------- ------------------- -------------------- -------------------
Loss from continuing operations (1,046,054) (1,099,175) (437,755) (564,357)
Discontinued Operations
Loss from discontinued operations (net
of tax provision of $0) (190,582) (253,730) (65,217) (97,275)
Loss on sale of discountinued operations (66,742) - (66,742) -
-------------------- ------------------- -------------------- -------------------
Net Loss $ (1,303,378) $ (1,352,905) $ (569,714) $ (661,632)
==================== =================== ==================== ===================
Basic and diluted net loss per share:
Loss from continuing operations $ (0.09) $ (0.13) $ (0.04) $ (0.07)
Loss from discontinued operations (0.02) (0.03) (0.01) (0.01)
Loss on sale of discontinued operations (0.01) - (0.01) -
----------------- ---------------- ----------------- ----------------
Net loss per share (0.12) (0.16) (0.05) (0.08)
================= ================ ================= ================
Shares used to compute basic and
diluted net loss per share 11,024,676 8,583,482 11,459,480 8,601,313
==================== =================== ==================== ===================
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5
<PAGE>
Virtgame.Com Corp.
and subsidiaries
consolidated STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
(Unaudited) (Unaudited)
----------------------- -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (1,046,054) $ (1,099,174)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation 134,570 67,742
Changes in operating assets and liabilities:
Decrease (increase) in:
Restricted cash 150,000
Prepaid expenses and other current assets 2,932 12,153
(Decrease) increase in:
Accounts payable and accrued expenses 49,541 (25,627)
----------------------- -----------------------
Net cash flows used in continuing operating activities (859,011) (894,906)
----------------------- -----------------------
Cash flows used by discontinued operating activities (41,483) (157,931)
Cash flows from investing activities:
Increase in deposits (1,214) (49,109)
Purchase of equipment (149,674) (17,364)
--------------------- --------------------
Net cash flows used in investing activities (150,888) (66,473)
--------------------- --------------------
Cash flows from financing activities:
Net proceeds from sale of common stock 656,499 783,338
Increase in notes payable 2,214 157,295
Increase in capital lease 16,992 -
----------------------- -----------------------
Net cash flows provided by financing activities 675,705 940,633
----------------------- -----------------------
Net increase (decrease) in cash and cash equivalents (375,677) (178,677)
Cash and cash equivalents at beginning of period 422,309 405,963
----------------------- -----------------------
Cash and cash equivalents at end of period $ 46,632 $ 227,286
======================= =======================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 12,435 $ 9,262
======================= =======================
Income Taxes $ 4,244 $ 2,837
======================= =======================
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Basis of Presentation
---------------------
These condensed consolidated financial statements of Virtgame.com Corp. (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 1999. In the opinion of management,
the financial information set forth in the accompanying condensed consolidated
financial statements reflects 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
-------
During the quarter ended June 30, 2000 Virtgame.com corp. (formerly Virtual
Gaming Technologies, Inc.) closed its Antigua office and discontinued marketing
its casino and sports book operations in order to reduce overhead, focus on the
Internet gaming software application business and execute its business plan as
an Application Service Provider ("ASP") for the gaming industry. As a result of
the Company finalizing the plan of closing its offshore office and discontinuing
marketing its casino and sports book, all the operations, assets and liabilities
of the casino and sports book business have been reflected in the accompanying
consolidated financial statements and discussions and analysis as discontinued
operations.
The Company has also been focusing on developing its proprietary "eBorder
Control" technology for its Internet gaming software applications, such as
Internet lottery, casino and sports book markets. Virtgame.com has developed
two separate eBorder Control technologies, one on a Macro level, keeping certain
jurisdictions out of its system and the other, on a Micro level, working only
within a certain jurisdiction. The Macro eBorder Control technology uses a
proprietary database developed by Virtgame.com to limit Internet users of
certain jurisdictions from doing e-commerce with a specific Web site. The Micro
eBorder Control technology uses a telephone caller origination identifier system
together with Virtgame's proprietary Active User Verification Software (AUVS).
AUVS is a plug-in that uses a dial-up connection to restrict access to a
specified jurisdiction, such as a single state.
During the quarter ending June 30, 2000, the Company finished installing its
Primeline sports book software, together with its Micro eBorder Control
software, at one of the Coast Resort casinos in Nevada as a pre-requisite to
getting approval from the Nevada Gaming Board. The system, a sports wagering
software, strictly accessible by Nevada residents only, is effectively a closed
loop Internet system for the state of Nevada. The Company anticipates receiving
the Nevada Gaming Board approval in the third quarter of year 2000.
Private Placement
-----------------
Between February 1999 and June 1999, the Company conducted a private placement
of 700,000 shares of Common Stock at an offering price of $3.00 per share,
pursuant to Rule 506 under the 1933 Act. In that offering, the Company sold a
total of 181,359 shares of Common Stock for the gross proceeds of $544,080.
Between August 1999 and January 2000, the Company conducted a private placement
of 1,400,000 shares of Common Stock, at a price of $1.50 per share, pursuant to
Rule 506 under the 1933 Act. In that offering, the Company sold 1,301,600
shares of Common Stock for the gross proceeds of $1,952,400.
In February and March 2000, the Company conducted a private placement of
1,000,000 shares of Common Stock, at a price of $1.50 per share, pursuant to
Rule 506 under the 1933 Act. In that offering, the Company sold 240,000 shares
of Common Stock for the gross proceeds of $360,000.
7
<PAGE>
In April 2000, the Company started a private placement of 1,000,000 shares of
Common Stock, at a price of $0.50 per share, pursuant to Rule 506 under the 1933
Act. As of the date of this 10-QSB report, the Company has sold 754,000 shares
for the gross proceeds of $377,000.
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.
Revenue recognition
-------------------
During the quarter ending June 30, 2000 the Company started generating revenue
as an Internet software provider. The Company has derived all of its revenues
from providing Internet application services. Prior to the quarter ending June
30,2000, all the Company's revenue were derived from operating an Internet
casino and sports book for non-U.S. residents. These revenues are reflected in
the consolidated statements of operations as discontinued operations.
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 related 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.
The Financial Accounting Standard Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the costs of computer
software to be Sold, Leased, or Otherwise Marketed" in August 1985. The Company
applies SFAS No. 86, which specifies that costs incurred internally in creating
a computer software product shall be charged to expense when incurred as
research and development until technological feasibility has been established
for the product. Thereafter, all software production costs shall be capitalized
and amortized over the remaining estimated economic life of the product.
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
--------------------------------------------------------------------
Plan of Operations
------------------
During the quarter ending June 30, 2000 the Company discontinued marketing its
casino style gaming over the Internet to reduce overhead, focus on the Internet
gaming software application business and execute its business plan as an
Application Service Provider ("ASP") for the gaming industry. As of August 9,
2000, the Company has conducted limited marketing of its Internet gaming
application software and, consequently, the Company generated only $119,388 of
revenues from providing application services.
The Company has financed its activities to date through the sale of its
securities. In April 2000, the Company started a private placement of 1,000,000
shares of Common Stock, at a price of $0.50 per share, pursuant to Rule 506
under the 1933 Act. As of the date of this 10-QSB report, the Company has sold
754,000 shares for the gross proceeds of $377,000.
As of June 30, 2000, the Company had a negative working capital of $316,537 and
stockholders' equity of $876,285. The Company's plan of operations for the next
12 months is to provide software application services, sell and lease its
software products.
Comparison of operations to prior year quarter
----------------------------------------------
The company began generating software application service revenues during the
quarter ending June 30, 2000. Revenues from continuing operations were $29,000
for the three and six months ending June 30, 2000. All revenues earned in
operating Internet casino and sports book operations are reflected as
discontinued operations in the Statement of Operations for the three and six
months ending June 30, 2000 and June 30, 1999.
Operating expenses from continuing operations decreased by 17% to $460,807 for
the three months ended June 30, 2000 compared to $552,693 of operating expenses
for continued operations during the prior year quarter, and decreased by 2% to
$1,061,558 for the six month period June 30, 2000 from $1,078,439 for the prior
year six month period. The decrease in operating expenses was primarily due to
reduced number of employees. Interest expense decreased to $6,566 for the three
months ended June 30, 2000 from $11,833 for the prior three months and decreased
to $12,435 for the six months ended June 30, 2000 from $19,005 for the six
months ended June 30, 1999. The decrease was mainly resulted from a reduction of
notes payable.
Net loss from continuing operations for the three months ended June 30, 2000 was
$437,755 and for the six months ended June 30, 2000 was $1,046,054 compared to
net loss from continuing operations of $564,357 for the three months and
$1,099,175 for the six months ending June 30, 1999.
Liquidity and Capital Resources
-------------------------------
As of June 30, 2000 the Company had $46,632 in cash and cash equivalents
compared to $498,923, including cash and cash equivalents of $76,614 included in
net assets of discontinued operations, at December 31, 1999. Working capital at
June 30, 2000 decreased by $651,120 to negative working capital of $316,537 from
$334,583 on December 31, 1999. The decrease was due to the loss incurred in the
quarter. The Company believes that it will require, at least, an additional
$1,000,000 of capital over the next 12 months in order to fund its Internet
gaming software development and to finance the continuing losses from operations
as the Company endeavors to build revenue and reach profitable operations.
In February and March 2000, the Company conducted a private placement of
1,000,000 shares of Common Stock, at a price of $1.50 per share, pursuant to
Rule 506 under the 1933 Act. In that offering, the Company sold 240,000 shares
of Common Stock for the gross proceeds of $360,000.
9
<PAGE>
In April 2000, the Company started a private placement of 1,000,000 shares of
Common Stock, at a price of $0.50 per share, pursuant to Rule 506 under the 1933
Act. As of the date of this 10-QSB report, the Company has sold 754,000 shares
for the gross proceeds of $377,000.
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, 1999 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.
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 1998 Annual 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.
10
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Inapplicable.
Item 2. Changes in Securities.
----------------------
In April 2000, the Company started a private placement of 1,000,000
shares of Common Stock, at a price of $0.50 per share. As of the
date of this 10-QSB report, the Company has sold 754,000 shares for
the gross proceeds of $377,000. The shares were issued pursuant to
Rule 506 under the Securities Act of 1933, as amended. There was a
finder involved in some of the issuances and the finder received
754,000 shares of Common Stock in payment of finder's fees.
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
--- --------
Financial Data Schedule - Exhibit 27.1
(b) Reports on Form 8-K
--- -------------------
Inapplicable.
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.
Virtgame.com Corp.
(Registrant)
Date: August 9, 2000 /s/ BRUCE MERATI
--------------
Bruce Merati
Chief Financial Officer
11
