UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2006
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OR
|_| TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from: _________________ to _________________
Commission file number: 000-28399
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Gaming & Entertainment Group, Inc.
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(Exact name of small business issuer as
specified in its charter)
Utah 59-1643698
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
16821 Escalon Dr., Encino, CA 91436
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(Address of principal executive offices)
(818) 400-5930
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) YES |_| NO |X|
Applicable Only to Issuers Involved in Bankruptcy Proceedings During the
Preceding Five Years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. YES |_| NO |_|
Applicable Only to Corporate Issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
19,830,602 shares of common stock, $0.01 par value, as of May 17, 2006
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Transitional Small Business Disclosure Format (check one): YES |_| NO |X|
-- 1 --
FORM 10-QSB
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION ............................................................. 3
ITEM 1. FINANCIAL STATEMENTS ..................................................... 3
Condensed Consolidated Balance Sheets
March 31, 2006 and December 31, 2005 (Unaudited) ................ 3
Condensed Consolidated Statements of Operations
For the Three Months ended March 31, 2006 and 2005 (Unaudited) .. 4
Condensed Consolidated Statement of Stockholders' Deficiency
For the Three Months ended March 31, 2006 (Unaudited) ........... 5
Condensed Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2006 and 2005 (Unaudited) .. 6
Notes to Condensed Consolidated Financial Statements (Unaudited) ......... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ................ 15
Results of Operations .................................................... 17
Liquidity and Capital Resources .......................................... 19
Risk Factors ............................................................. 20
ITEM 3. CONTROLS AND PROCEDURES .................................................. 21
PART II - OTHER INFORMATION ................................................................ 22
ITEM 1. LEGAL PROCEEDINGS ........................................................ 22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS .............. 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .......................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................... 22
ITEM 5. OTHER INFORMATION ........................................................ 22
ITEM 6. EXHIBITS ................................................................. 22
SIGNATURE .................................................................................. 23
-- 2 --
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2006 AND
DECEMBER 31, 2005
(UNAUDITED)
ASSETS
March 31, December 31,
2006 2005
----------- ------------
Current Assets
Cash $ 398,230 $ 122,318
Accounts Receivable -- 90,142
----------- -----------
Total current assets 398,230 212,460
Equipment and Furnishings, net of accumulated depreciation of $69,406
and $317,858 91,701 132,625
Intangible Assets, net of accumulated amortization of $0 and $31,350 -- 282,150
Other Assets 10,985 10,272
----------- -----------
Total assets 500,916 637,507
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 45,344 $ 163,998
Accrued expenses 269,636 229,598
Accrued compensation - officers 283,456 220,539
Notes payable - officers -- 55,548
----------- -----------
Total current liabilities 598,436 669,683
Long-Term Liabilities
Senior secured note payable, net of unamortized debt discount of
$813,890 and $869,407 1,186,110 1,130,593
Deferred rent 30,847 33,052
----------- -----------
Total long-term liabilities 1,216,957 1,163,645
----------- -----------
Total liabilities 1,815,393 1,833,328
----------- -----------
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 6,783,528 6,783,528
Accumulated deficit (8,433,636) (8,315,625)
Accumulated other comprehensive income - foreign currency translation gains 137,325 137,970
----------- -----------
Total stockholders' deficiency (1,314,477) (1,195,821)
----------- -----------
Total liabilities and stockholders' deficiency $ 500,916 $ 637,507
=========== ===========
See accompanying notes to condensed consolidated financial statements
-- 3 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
------------ ------------
Revenues:
Services $ 138,247 $ 229,780
Product -- 5,000
------------ ------------
Total revenues 138,247 234,780
------------ ------------
Cost of revenues:
Services 73,935 99,042
Product -- 5,696
------------ ------------
Total cost of revenues 73,935 104,738
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Gross profit 64,312 130,042
------------ ------------
Operating expenses:
Research and development 66,894 158,210
Selling, general and administrative 225,558 378,936
------------ ------------
Total operating expenses 292,452 537,146
------------ ------------
Operating loss (228,140) (407,104)
------------ ------------
Other income (expense):
Interest expense and amortization of debt discount (105,917) (86,032)
Other income 7,893 53,177
Gain on sale of assets 208,153 --
Gain on fair value of warrants -- 2,717
Fair value of penalty common stock -- (79,982)
------------ ------------
Total other income (expense) 110,129 (110,120)
------------ ------------
Net loss $ (118,011) $ (517,224)
------------ ------------
Weighted average number of shares outstanding 19,830,602 19,161,930
============ ============
Net loss per share - basic and diluted $ (0.01) $ (0.03)
============ ============
See accompanying notes to condensed consolidated financial statements
-- 4 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
Accumulated
Common Stock Additional Other
--------------------------- Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income Total
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 1, 2006 19,830,602 $ 198,306 $ 6,783,528 $(8,315,625) $ 137,970 $(1,195,821)
Foreign currency translation
loss (A) -- -- -- -- (645) (645)
Net loss -- -- -- (118,011) -- (118,011)
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2006 19,830,602 $ 198,306 $ 6,783,528 $(8,433,636) $ 137,325 $(1,314,477)
=========== =========== =========== =========== =========== ===========
(A) Comprehensive loss (net loss plus or minus foreign currency
translation loss or gain) for the three months ended March 31, 2006 and
2005 totaled $118,656 and $521,094, respectively.
See accompanying notes to condensed consolidated financial statements
-- 5 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
--------- ---------
Cash flows from operating activities
Net loss $(118,011) $(517,224)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on sale of assets (208,153) --
Amortization of debt discount 55,517 55,517
Amortization of intellectual property 7,730 --
Amortization of deferred rent (2,204) (8,099)
Depreciation expense 16,691 23,319
Fair value of penalty common stock -- 79,982
Gain on fair value of warrants -- (2,717)
Changes in operating assets and liabilities:
Accounts receivable 90,605 74,948
Accounts payable (119,432) 11,982
Accrued expenses 40,620 34,874
Accrued compensation - officers 62,917 32,495
Foreign taxes payable -- (166,009)
--------- ---------
Net cash used in operating activities (173,720) (380,932)
--------- ---------
Cash flows from investing activities
Proceed from sale of intangible assets 500,000 --
Proceeds from sale of equipment and furnishings 6,000 --
Acquisition of intangible assets -- (50,000)
Acquisition of equipment and furnishings -- (4,413)
--------- ---------
Net cash provided by (used in) investing activities 506,000 (54,413)
--------- ---------
Cash flows from financing activities
Payment of note payables (55,548) (37,500)
Proceeds from the issuance of senior secured note and warrants -- 250,000
--------- ---------
Net cash provided by (used in) financing activities (55,548) 212,500
--------- ---------
Effect of exchange rate changes on cash (820) (3,673)
--------- ---------
Net increase/(decrease) in cash 275,912 (226,518)
Cash, beginning of period 122,318 594,024
--------- ---------
Cash, end of period $ 398,230 $ 367,506
========= =========
Supplemental disclosure of cash flow information
Interest paid $ 21,285 $ --
========= =========
Supplemental schedule of noncash investing and financing activities:
Intangible assets purchased in exchange for common stock and
warrants $ -- 263,500
========= =========
See accompanying notes to condensed consolidated financial statements
-- 6 --
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"). In the transaction, NorStar issued
14,600,000 shares of common stock in exchange for all of the outstanding shares
of common stock 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.
The Company's historical focus has been on the design and deployment of gaming
platforms for utilization in the Internet-based gaming market. The Company has
expanded its product line to include gaming systems and game content for
deployment in land-based gaming establishments. Specifically, we have developed
a proprietary gaming platform, amusement with prizes, or AWP, and Section 16
games for deployment in the United Kingdom and other European gaming markets
that offer these types of games. These AWP and Section 16 games consist of
roulette, slots and poker games. The foregoing is our current business focus.
As used herein, the "Company" refers to G&EG Nevada prior to January 12, 2004
and to G&EG and its subsidiaries from that date forward.
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
March 31, 2006 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 shown in the
financial statements, the Company has incurred losses of $118,011 for the three
months ended March 31, 2006, and recurring losses in prior years. As of March
31, 2006, the Company had an accumulated deficit of $8,433,636 and a
stockholders' deficiency of $1,314,477. These conditions raise substantial doubt
about the Company's ability to continue as a going concern for a reasonable
period of time. The Company's ability to continue as a going concern for a
reasonable period of time is dependent upon its ability to generate sufficient
cash flows from its operations or obtain sufficient liquid resources from other
sources to meet its obligations as they become due. The Company had a working
capital deficiency of $200,206 at March 31, 2006, and used $173,720 of net cash
in operating activities in the three months ended March 31, 2006.
The Company has undertaken an assessment as to whether its long-lived assets
have been impaired following the sale of certain assets by the Company in the
three months ended March 31, 2006. 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.
-- 7 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Through March 31, 2006, the Company has funded its operations primarily through
the issuance of common stock, warrants and options to outside investors for cash
and consultants and others for services, and the issuance of promissory notes
and warrants to third parties, specifically Cantor G&W (Nevada), L.P. ("Cantor")
since September 2004. Management anticipates that additional funding of not less
than $250,000 will be necessary to fund the Company's operations through March
31, 2007. Management believes, but cannot assure, that the Company will be able
to obtain such funding through product placements and third party financing and
continue its operations through at least March 31, 2007. If the Company is not
able to obtain adequate financing, it may have to curtail or terminate some, or
all, of its operations. The accompanying unaudited condensed 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 from the enhancement, maintenance and technical support of Internet
gaming sites in regulated gaming markets, in relation to software development
previously performed, are recognized as the services are performed, or if no
pattern of performance is discernable, on a straight-line basis over the period
in which the services have been performed.
Revenues from Internet gaming site development contracts in regulated gaming
markets, in relation to software development previously performed, has been
recognized using the percentage of completion method of accounting with labor
hours as the basis for measurement of progress toward completion of the
contracts.
Revenues from online gaming software license fees, in relation to the
utilization of the Company'sproprietary gaming platform, which was sold to
Cantor G&W (Nevada), L.P. in February 2006, will be recognized as earned based
upon a percentage of the gross win realized by Cantor from its Cantor Casino and
other white label Internet gaming sites it may develop in the future. When the
Company receives a percentage of the gaming revenues generated by clients of
Cantor, it will recognize such revenues when earned. To this end, the Company
will receive royalties, on an annual basis during the period the secured
promissory note with Cantor remains outstanding, to be applied against the
outstanding principal and accrued interest under the secured promissory note.
-- 8 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Revenue from gaming machines that are sold will be recognized upon completion of
installation and acceptance by the gaming establishment, provided collectibility
is reasonably assured.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based
Payment" ("FAS 123(R)"), an amendment of SFAS No. 123, "Accounting for
Stock-Based Compensation," using the modified prospective transition method.
Under this transition method, compensation costs are recognized beginning with
the effective date: (a) based on the requirements of FAS 123(R) for all
share-based awards granted after the effective date and (b) based on the
requirements of FAS 123 for all awards granted to employees prior to the
effective date of FAS 123(R) that remain unvested on the effective date.
Accordingly, we did not restate the results of prior periods. The most notable
change with the adoption is that compensation expense associated with stock
options will be recognized in our Statements of Operations, rather than being
disclosed in a pro forma footnote to our financial statements.
Prior to January 1, 2006, the Company accounted for stock options granted under
our 2004 Stock Option Plan under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related interpretations, as permitted by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123). SFAS No. 123(R) requires forfeitures to be estimated at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. In the Company's pro forma disclosures required
under SFAS No. 123 for the periods prior to 2006, the Company accounted for
forfeitures as they occurred. The Company has historically and continues to
estimate the fair value of share based awards using the Black-Scholes-Merton
("Black-Scholes") option-pricing model.
The exercise price of all of the options granted to employees and consultants
has been equal to or greater than the fair market value at the date of grant
and, accordingly, the Company has not recorded any earned or unearned
compensation cost related to such options in the accompanying condensed
consolidated financial statements. As a result of adopting FAS 123(R), the
compensation expense that would be recognized for the three months ended March
31, 2006 due to all options outstanding, net of estimated forfeitures being
fully vested as at January 1, 2006, was not material.
In accordance with the provisions of SFAS 123, all other issuances of common
stock, options or other equity instruments to employees and consultants as
consideration for goods or services received by the Company are accounted for
based on the fair value of the equity instruments issued (unless the fair value
of the consideration received can be more reliably measured). The fair value of
any options or similar equity instruments issued will be estimated based on the
Black-Scholes option-pricing model, which meets the criteria set forth in SFAS
123, and the assumption that all of the options or other equity instruments will
ultimately vest.
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 months ended March 31,
2006 and 2005, 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 March 31, 2006 and 2005, the
Company had options and warrants outstanding for the purchase of 9,789,918 and
17,215,929 shares of common stock, respectively, that were not included in the
computation of diluted loss per share.
-- 9 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Concentrations
The Company currently receives nearly all of its revenue from Cantor. It is
anticipated that the Company's revenue sources will significantly diversify in
future periods.
Intangible Assets
Intangible assets, which consist of intellectual property, are recorded at cost
and amortized on a straight-line basis over their estimated useful lives of 5
years. Gains or losses from disposals are credited or charged to income.
Reclassifications
Certain reclassifications of previously reported amounts have been made to
conform to the current period presentation.
NOTE 3 - INTANGIBLE ASSETS
Intangible assets consist of the following as of March 31, 2006:
Cost Accumulated Net Proceeds Gain on
Amortization from sale sale of
of IP IP
Amortizable intangible assets
Intellectual Property $315,500 $ 41,080 $274,420 $500,000 $225,580
======== ======== ======== ======== ========
On February 15, 2006, the Company entered into an Asset Purchase Agreement (the
"Cantor Asset Purchase Agreement") with Cantor.
Pursuant to the terms of the Cantor Asset Purchase Agreement, Cantor paid the
Company $500,000 in consideration for certain assets, including (i) the source
and object code relating to the software previously licensed by Cantor pursuant
to the License Agreement, including all intellectual property rights thereto,
and all related documentation, (ii) all graphics relating to the source code for
all Internet casino developed previously by the Company, excluding certain
graphics owned by third parties and (iii) various hardware consisting of
computer servers, personal computers and other computer equipment.
-- 10 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 4 - COMMITMENTS
Consulting Agreements
On February 15, 2006, Kevin J. Burman, Chief Operating Officer of the Company
and a director of each of its wholly-owned subsidiaries, resigned from all of
the above positions. Mr. Burman accepted employment with Cantor as its Chief
Development Officer. The foregoing was mutually agreed upon by Mr. Burman, the
Company and Cantor. Mr. Burman's resignation did not involve any disagreement
with the Company, its officers or directors.
In conjunction with the Cantor Asset Purchase Agreement, all further obligations
of the Company, pursuant to the asset purchase agreement with Absolute Game,
Ltd., have been terminated. In addition, the consulting agreement with Peter
Bengtsson of Absolute Game, Ltd. has been terminated. No accounts payable or
accrued expenses were forgiven in conjunction with the foregoing.
Operating Leases
On March 31, 2006, the Company vacated its office in North Sydney, Australia,
with a monthly lease rate of $13,000 Australian dollars (approx. US$10,250).
This lease was subject to an oral agreement which required 6-months advance
written notice prior to vacating the premises. Notice to vacate was given on
October 1, 2005.
NOTE 5 - STOCK OPTIONS AND WARRANTS
Stock Options
A summary of the changes in outstanding stock options during the three months
ended March 31, 2006 follows:
Weighted-
Average
Shares Exercise Price
--------- --------------
Outstanding, January 1, 2006 1,923,168 $ 0.77
Granted -- $ --
Forfeited -- $ --
---------
Outstanding, March 31, 2006 1,923,168 $ 0.77
=========
Exercisable, March 31, 2006 1,909,168 $ 0.77
=========
-- 11 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Stock Warrants
Pursuant to the terms of the Cantor Asset Purchase Agreement, the equity
warrant, previously issued in favor of Cantor, was modified to reduce the number
of shares exercisable thereunder, at a price of $0.60 per share, from 8,000,000
shares to 2,000,000 shares.
A summary of the changes in outstanding warrants during the three months ended
March 31, 2006 follows:
Weighted-Average
Shares Exercise Price
----------- ----------------
Outstanding, January 1, 2006 13,966,750 $ 0.55
Amendment to Equity Warrant (6,000,000) $ 0.60
Expired (100,000) $ 0.75
-----------
Outstanding, March 31, 2006 7,866,750 $ 0.50
===========
NOTE 6 - 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 March 31, 2006, the Company did
not have any shares of preferred stock outstanding.
NOTE 7 - 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 (6%). As of March 31, 2006, the unamortized
debt discount on the Note was $813,890.
On February 15, 2006, Gaming & Entertainment Group, Inc. and its wholly-owned
subsidiary Gaming & Entertainment Technology Pty Limited, entered into the
Cantor Asset Purchase Agreement with Cantor.
Pursuant to the terms of the Cantor Asset Purchase Agreement, Cantor paid the
Company $500,000 in consideration for certain assets, including (i) the source
and object code relating to the software previously licensed by Cantor pursuant
to the License Agreement, including all intellectual property rights thereto,
and all related documentation, (ii) all graphics relating to the source code for
all Internet casino developed previously by the Company, excluding certain
graphics owned by third parties and (iii) various hardware consisting of
computer servers, personal computers and other computer equipment. The Company
recognized a gain of $225,580 on the sale of the assets to Cantor.
The terms of the Cantor Asset Purchase Agreement also include (I) the
termination of the License Agreement between the Company and Cantor, (II) the
termination of the Investment Agreement between the Company and Cantor, (III) an
amendment to the Note as follows: (a) forgiveness, on an annual basis during the
period the Note remains outstanding, of outstanding principal and accrued
interest under the Note in an amount equal to the royalties that would have been
payable to the Company relating to the Cantor Casino and all future
"white-label" Internet casino clients of Cantor had the License Agreement not
been terminated; (b) amodification of "change of control" of the Company so that
Cantor may only require immediate repayment of the Note in the event a "person"
or "group" (as such terms are used in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended) becomes the beneficial owner, directly or
indirectly, of 51% of the voting common stock of the Company (i) through
acquisition of common stock of the Company, (ii) as a result of a merger or
consolidation involving the Company, or (iii) as a result of the sale of all or
substantially all of the assets of the Company, and (c) allows for prepayments
of the outstanding principal and accrued interest under the Note, (IV) an
amendment to the Security Agreement between the Company and Cantor which
provides that Cantor's security interest in the assets of the Company shall be
subordinated with respect to any collateral acquired by the Company with the
proceeds of any future debt or equity issuances, (V) an amendment to the Equity
Warrant to reduce the number of shares exercisable thereunder, at a price of
$0.60 per share, from 8,000,000 shares to 2,000,000 shares, and (VI) the
termination of the Option Agreement.
-- 12 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 8 - RELATED PARTY TRANSACTIONS
On September 6, 2004, the Company entered into promissory notes payable with
Tibor Vertes, our Chief Executive Officer and Chairman, and Gregory L. Hrncir,
our President, for accrued salary and legal services rendered, respectively.
Repayment of the notes commenced on October 1, 2004 and matured on December 1,
2005. The notes were non-interest bearing. However, the notes remained unpaid
upon maturity and upon the occurrence of a default, the principal amount of the
notes were increased to reflect accrued interest of ten percent (10%).
On February 27, 2006, the Company repaid the outstanding balance of Mr. Vertes'
and Mr. Hrncir's notes of $20,138 and $35,410, respectively. Interest paid
during the three months ended March 31, 2006, on Messrs. Vertes' and Hrncir's
notes, amounted to $7,844 and $13,441, respectively.
-- 13 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
NOTE 9 - INFORMATION ABOUT GEOGRAPHICAL AREAS
The Company presently operates in one reportable segment - gaming software
development. Revenue information and long lived assets by geographical area is
set forth below for the three months ended March 31, 2006 and 2005:
March 31, 2006
Geographical area Revenues from Long-lived assets
external
customers
--------------------------------------------------------------------------
United States -- $ 53,831
United Kingdom -- $ 3,782
Australia $138,237 $ 34,088
----------------------------
$138,237 $ 91,701
============================
March 31, 2005
Geographical area Revenues from Long-lived assets
external
customers
--------------------------------------------------------------------------
United States $ 5,000 $121,772
United Kingdom -- $ 2,116
Australia $229,780 $ 19,447
----------------------------
$234,780 $143,335
============================
-- 14 --
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 of 1933 and Section 21E of the Securities Exchange Act of 1934,
or the Exchange Act, such as statements relating to plans for product
development, product placement, capital spending and financing sources. 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 liquidity requirements, our ability to locate necessary
sources of capital to sustain our operations, the continued growth of the gaming
industry, the success of our product development activities, the acceptance of
our products in the marketplace, vigorous competition in the gaming industry,
our dependence on existing management, changes in gaming laws and regulations
(including actions affecting licensing), our leverage and debt service
(including sensitivity to fluctuations in interest rates) and domestic or global
economic conditions.
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.
Since 1995, we have been a supplier of government-regulated networked
gaming technology. During this period, we have built a comprehensive networked
gaming platform that has passed multiple government prescribed validations in
Australia (Tasmania and Queensland), Republic of Vanuatu and Great Britain
(Alderney and the Isle of Man). Our historical focus has been on the design and
deployment of our gaming platform for utilization in the Internet-based gaming
market, as evidenced by our prior agreements with several traditional land-based
gaming operators and Australia-based online operators. We have expanded our
product line to include gaming systems and game content, ultimately for
deployment in land-based gaming establishments. Specifically, we have developed
a proprietary gaming platform, amusement with prizes, or AWP, and Section 16
games for deployment in the United Kingdom and other European gaming markets
that offer these types of games. The foregoing is our current business focus.
Our current business strategy consists of the following:
o Commercialization of our AWP and Section 16 games in the United
Kingdom initially, and thereafter in other European Union countries
where these types of games are prominent
o Partnering with a major gaming equipment manufacturer for land-based
gaming applications of our central server gaming platform
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.
-- 15 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
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 will include in subsequent
periods, future volatility used in valuing equity instruments, allowances for
bad debts, depreciable lives of gaming equipment in service and other 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
Through March 31, 2006, our revenues were generated from the development
of prospective Internet gaming sites in regulated gaming markets outside of the
United States, as well as maintenance and technical support contracts. 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. In conjunction with this license, we received a monthly
development fee for the development of the Cantor Casino, which went live on
October 1, 2005 and does not permit bets to be placed by individuals in the
United States. The development fees concluded in February 2006 upon the sale of
certain assets to Cantor. We will, however, continue to receive 15% of the net
win realized by the Cantor Casino following repayment of certain expenses
associated therewith. In addition, it is anticipated that Cantor will develop
"white-label" Internet gaming sites (i.e. third party entities that utilize the
internet gaming platform licensed by Cantor from the Company), each of which
will prohibit bets in the United States, for clients of Cantor. Similar to the
Cantor Casino, we will receive a development fee and a portion of the net win
realized by such "white-label" sites. Our portion of the net win will be
applied, on an annual basis, against the outstanding principal and accrued
interest under the secured promissory note payable in favor of Cantor.
The placement of gaming equipment is capital intensive. In this regard, to
the extent we make such placements, we will require a credit facility sufficient
to finance the manufacture and deployment of our gaming machines. At this time,
we do not have a credit facility.
Historically, we have experienced substantial fluctuations in revenues
from period-to-period as a result of our revenues being derived solely from
software development contracts consisting of upfront licensing and periodic
payments as opposed to steady recurring revenues. Moreover, our revenues have
been limited over the last two years as we have been focused on the development
of the Cantor Casino and development of video poker, slot and roulette products
for deployment in Europe.
We anticipate that our future revenues will be primarily derived from the
placement of gaming machines on a sale basis in Europe and, to a lesser extent,
from the Cantor relationship. At this time, it is difficult to predict the
breakdown of anticipated future revenues from each of the foregoing initiatives.
-- 16 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Revenue Recognition
Revenue from the development of Internet gaming sites in regulated gaming
markets is reported on the percentage of completion method of accounting using
measurements of progress toward completion appropriate for the work performed.
The development of Internet gaming sites concluded on February 15, 2006 as a
result of the sale of our Internet gaming system and games to Cantor on such
date. Thus, after February 15, 2006, we will not realize revenues from the
development of Internet gaming sites.
Revenues from the enhancement, maintenance and technical support of
Internet gaming sites in regulated gaming markets are recognized as the services
are performed or pro rata over the service period. When we receive a percentage
of the gaming revenues generated by Cantor and its Internet gaming clients, we
will generally recognize such revenues upon receipt. Based upon the sale of our
Internet gaming system and games to Cantor on February 15, 2006, we will not
realize revenues from the enhancement, maintenance and technical support of
Internet gaming sites following such date. We will, however, continue to receive
royalty payments, to be applied against the outstanding principal and accrued
interest under the senior secured note issued in favor of Cantor, with respect
to the Cantor Casino and all "white-label" Internet gaming sites developed by
Cantor utilizing the Internet gaming software sold by us to Cantor.
Revenues from the sale of gaming machines in the United Kingdom and other
European Union countries, as applicable, will be recognized upon completion of
installation and acceptance by the gaming operators, provided collectibility is
reasonably assured.
Revenues from the placement of our gaming machines on a revenue-sharing
basis, as well as the placement of our central server gaming system on a license
basis, if applicable, will be accounted for similar to an operating lease, with
the revenues recognized as earned over the term of the agreement. We will
negotiate our portion of the revenues generated under revenue-sharing contracts
based upon the cost of the equipment installed, the location of a particular
casino, and the estimated daily net win per gaming machine for each casino
client. At this time, we do not anticipate the placement of our existing gaming
machines on a revenue sharing basis. Further, unless we secure a major gaming
equipment manufacturer as a partner, it is highly unlikely that we will
commercialize our central server gaming system for downloadable gaming
applications at casinos.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2006 AND 2005
Revenues
During the three months ended March 31, 2006, we generated revenues from
the development of the Cantor Internet gaming site ("Cantor Casino"), technical
support services and product sales totaling $138,247, as compared to revenues
from services and product sales of $229,780 and $5,000, respectively, during the
three months ended March 31, 2005. The $96,533, or 41.12%, decrease in revenues
from services and the absence of any revenues from product sales during the
three months ended March 31, 2006 was due primarily to the cessation of Internet
gaming development undertaken on behalf of Cantor, based upon the sale of our
Internet gaming system and games to Cantor on February 15, 2006. Consequently,
we will not realize revenues from the enhancement, maintenance and technical
support of Internet gaming sites following such date. We anticipate commencing
sales of our AWP and Section 16 gaming machines in the United Kingdom in the
third quarter of 2006.
-- 17 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Cost of Revenues
During the three months ended March 31, 2006, our cost of revenues was
$73,935 compared to $104,738 during the three months ended March 31, 2005.
During the three months ended March 31, 2006, our costs of revenues related only
to services, whereas, during the three months ended March 31, 2005, our costs of
revenues consisted of $99,042 attributable to services and $5,696 attributable
to product sales. The $30,803, or 29.41%, decrease in the cost of revenues
related to services was due to the decrease in the revenues from services and
the timing of the recognition of costs related to such revenues. We did not
incur any costs related to product sales during the three months ended March 31,
2006 as we did not record any revenues from product sales during said period.
We realized gross profit of $64,312 during the three months ended March
31, 2006, compared to gross profit of $130,042 during the three months ended
March 31, 2005. The $65,730 or 50.55% 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.
Operating Expenses
For the three months ended March 31, 2006, we incurred total operating
expenses of $292,452, compared to $537,146 for the three months ended March 31,
2005, a decrease of $244,694, or 45.55%. The decrease in total operating
expenses relates to a $91,316 decrease in research and development expenses and
a $153,378 decrease in selling, general and administrative expenses.
During the three months ended March 31, 2006, we incurred research and
development expenses of $66,894, compared to $158,210 during the three months
ended March 31, 2005, a decrease of $91,316, or 57.72%. The decrease in our
research and development expenses was due primarily to the development of the
Cantor Casino utilizing our existing Internet gaming platform and a significant
reduction of personnel in the three months ended March 31, 2006 as compared to
the same period in 2005. We anticipate making our initial deployment of AWP and
Section 16 games into the United Kingdom market in the third quarter of this
year utilizing our strategic partner, Electrocoin. Thereafter, we anticipate
selling such gaming machines in other European Union jurisdictions where such
games are offered. While this is our initial deployment of gaming machines into
land-based gaming operations, we have minimized the risk by partnering with
Electrocoin, an established manufacturing and distribution company. Moreover, by
doing so, we have eliminated the traditional capital costs associated with the
deployment of gaming machines through avoidance of manufacturing and the
establishment of a sales and distribution team. However, we will need to procure
a credit facility to finance the production of the gaming machines during the
period commencing upon the conclusion of manufacturing of the gaming machines
and concluding on the sale of such gaming machines. At this time we do not have
a credit facility.
During the three months ended March 31, 2006, we incurred selling, general
and administrative expenses of $225,558, compared to $378,936 during the three
months ended March 31, 2005, a decrease of $153,378, or 40.48%. The decrease in
our selling, general and administrative expenses was due primarily to the
reduced number of employees, the closure of our Las Vegas, Nevada offices and
the decrease in overseas travel associated with Internet gaming development on
behalf of Cantor.
Other Income (Expense)
For the three months ended March 31, 2006, other income was $110,129,
compared to other expense of $110,120 for the three months ended March 31, 2005,
an increase of other income of $220,249. The increase is related primarily to a
$208,153 gain on sale of assets and $7,893 of other income, offset in part, by
$50,400 of interest expense incurred in connection with the issuance of the
senior secured note payable and $55,517 amortization of associated debt
discount.
-- 18 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Net Loss
For the three months ended March 31, 2006, we experienced a net loss of
$118,011, compared to a net loss of $517,224 for the three months ended March
31, 2005, a decrease of $399,213, or 77.18%. The significant decrease in the net
loss is directly attributable to a $244,694 reduction in operating expenses, a
$220,249 increase in other income, offset, in part, by a $65,730 decrease in
gross profit.
LIQUIDITY AND CAPITAL RESOURCES
Overview
As of March 31, 2006, we had cash of $398,230 and total liabilities of
$1,815,393, of which $598,436 are current liabilities. Accordingly, as of March
31, 2006, we had a working capital deficiency of $200,206 and a stockholders'
deficiency of $1,314,477. During the three months ended March 31, 2006, cash on
hand increased by $275,912, from $122,318 to $398,230. The increase in cash
reflected $506,000 of net cash provided by investing activities, offset by
$173,720 of net cash used in operating activities and the $820 effect of
exchange rate changes on cash.
Operating activities used net cash of $173,720 during the three months
ended March 31, 2006, whereas operating activities used net cash of $380,932
during the three months ended March 31, 2005. The net cash used in operating
activities during the three months ended March 31, 2006 related primarily to our
net loss of $118,011, a decrease on gain on sale of assets of $208,153, a
decrease in amortization of deferred rent of $2,204, a decrease in accounts
payable in the amount of $119,432, offset, in part, by an increase in
amortization of debt discount of $55,517, an increase in amortization of
intellectual property of $7,730, an increase in depreciation expense of $16,691,
an increase in accounts receivable of $90,605, an increase in accrued expenses
of $40,620, and an increase in accrued compensation - officers of $62,917.
During the three months ended March 31, 2005, our operating activities used net
cash of $380,932, reflecting our net loss of $517,224, a decrease in
amortization of deferred rent of $8,099, a decrease on gain on fair value of
warrants of $2,717, a decrease on foreign taxes payable of $166,009, offset, in
part, by an increase in amortization of debt discount of $55,517, an increase in
depreciation expense of $23,319, an increase in the fair value of penalty common
stock of $79,982, a decrease in accounts receivable of $74,948, an increase in
accounts payable of $11,982, an increase in accrued expenses of $34,874, and an
increase in accrued compensation - officers of $32,495.
Investing activities provided $506,000 during the three months ended March
31, 2006, compared to $54,413 used during the three months ended March 31, 2005.
The increase in cash provided by investing activities relates to the sale of
certain intangible assets consisting of source code and graphics relating to our
Internet gaming software. Investing activities during the three months ended
March 31, 2005 reflect the purchase of certain intangible assets. We acquired
intellectual property consisting of next generation digital casino and poker
games.
Financing activities used $55,548 of net cash during the three months
ended March 31, 2006, compared to providing $212,500 of net cash used in
financing activities during the three months ended March 31, 2005. The net cash
used in our financing activities during the three months ended March 31, 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. The net cash provided by
our financing activities during the three months ended March 31, 2005 reflects
$250,000 from the issuance of a senior secured note under an existing debt
agreement.
-- 19 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Outlook
We incurred losses of $118,011 and $517,224 and negative net cash flows
from operating activities of $173,720 and $380,932 for the three months ended
March 31, 2006 and 2005, respectively. As of March 31, 2006, we had an
accumulated deficit of $8,433,636. These conditions raise substantial doubt
about our ability to continue as a going concern for a reasonable period of
time.
We anticipate that for the twelve month period ending March 31, 2006, we
will need a minimum of $250,000 in additional third party funding or future
revenues not otherwise contractually committed, for ongoing research and
development of our AWP and Section 16 gaming software, advertising and marketing
and the manufacture of gaming machines to be deployed on a sale, and possibly
recurring revenue, basis in Europe.
Until we generate sufficient cash from our operations, we will need to
rely upon private and institutional sources of debt and equity financing. Based
on presently known plans, we believe that we will be able to fund our operations
and required expenditures through the first quarter of 2006 through cash on hand
and revenue from existing development projects. We will require additional cash,
either through additional revenue realization, the exercise of warrants by
Cantor, or from third party debt or equity sources. Alternatively, we will be
forced to seek cash from other lending sources, sell certain assets or change
operating plans to accommodate such liquidity issues. No assurances can be given
that we will successfully obtain liquidity sources necessary to fund our
operations to profitability and beyond.
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 decline. These risks
factors include, but are not limited to, our limited operating history, history
of operating losses, the inability to obtain for additional capital, the failure
to successfully expand our operations, the barriers of entry into new gaming
markets, the competition in the gaming industry from competitors with
substantially greater resources, the legal and regulatory requirements and
uncertainties related to our industry, the inability to enter into strategic
partnerships with manufacturers and distributors, the loss of key personnel,
adverse economic conditions, adverse currency rate fluctuations, the inability
to protect our proprietary information against unauthorized use by third
parties, 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, the
costs associated with the issuance of and the rights granted to additional
securities, the unpredictability of the trading of our common stock and the
ability of our Board of Directors to issue up to collectively 10,000,000 shares,
$10 par value, of preferred 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 April 17, 2006.
-- 20 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
We evaluated the effectiveness of our disclosure controls and procedures
as of March 31, 2006, the end of the period covered by this Quarterly Report on
Form 10-QSB. This evaluation was done with the participation of our chief
executive officer and our president. Mr. Vertes serves as our principal
executive officer and Mr. Hrncir serves as our principal financial and
accounting officer.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
Limitations on the Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures
or our internal controls over financial reporting will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, but not absolute, assurance that the objectives of a control
system are met. Further, any control system reflects limitations on resources,
and the benefits of a control system must be considered relative to its costs.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of a control. The design of a control system
is also based upon certain assumptions about the likelihood of future events,
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Although unlikely, due to the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and may not be detected.
Management is aware that there is a lack of segregation of duties at the
Company due to the small number of employees dealing with general administrative
and financial matters. However, at this time management has decided that
considering the employees involved and the control procedures in place, the
risks associated with such lack of segregation are insignificant and the
potential benefits of adding employees to clearly segregate duties do not
justify the expenses associated with such increases. Management will
periodically reevaluate this situation.
Conclusions
Based on this evaluation, our chief executive officer and our president
concluded that, subject to the limitations noted above and as of the evaluation
date, our disclosure controls and procedures are effective to ensure that the
information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported in such
reports within the time periods specified in the Securities and Exchange
Commission's rules and forms.
-- 21 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
Changes in Internal Controls
There were no changes in our internal controls over financial reporting
that occurred during the last fiscal quarter, i.e., the three months ended March
31, 2006, that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS
(a) Exhibits.
31.1 Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350).
-- 22 --
GAMING & ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GAMING & ENTERTAINMENT GROUP, INC.
(Registrant)
Date: May 17, 2006 By: /s/ Gregory L. Hrncir
----------------------------------
Gregory L. Hrncir
Its: President and Secretary
-- 23 --