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SECURITIES
REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES
REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK, PAR VALUE
$.01
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 o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. o
State
issuer's revenues for its most recent fiscal year: $196,523
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of December 31, 2005:
Submission
of Matters to a Vote of Security Holders
10
Part
II
Item
5.
Market
for Common Equity and Related Stockholder Matters, and Small
Business
Issuer Purchases of Equity Securities
10
Item
6.
Management's
Discussion and Analysis of Financial Condition or Plan of
Operations
12
Item
7.
Financial
Statements
25
Item
8.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
25
Item
8A
Controls
and Procedures
25
Item
8B
Other
Information
25
Part
III
Item
9.
Directors,
Executive Officers, Promoters and Control Persons; Compliance
with
Section
16(a) of the Exchange Act
26
Item
10.
Executive
Compensation
29
Item
11.
Security
Ownership of Certain Beneficial Owners and Management, and Related
Stockholder
Matters
32
Item
12.
Certain
Relationships and Related Transactions
34
Item
13.
Exhibits
34
Item
14.
Principal
Accountant Fees and Services
38
Signatures
39
Financial
Statements
F-1
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-KSB contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In making
such statements, we must rely on estimates and assumptions drawn in light of
our
experience and our perception of historical trends, current conditions and
expected future developments, as well as other factors we believe are
appropriate under the circumstances. These estimates and assumptions are
inherently subject to significant business, economic and competitive
uncertainties, many of which are beyond our control. These uncertainties and
contingencies can affect actual results and could cause actual results to differ
materially from those expressed or implied in any forward-looking statements
made by us, or on our behalf.
In
particular, the words "expect,""anticipate,""estimate,""may,""will,""should,""intend,""believe", and similar expressions are intended to identify
forward-looking statements. In light of the risks and uncertainties inherent
in
all forward-looking statements, you should not consider the inclusion of
forward-looking statements in this report to be a representation by us or any
other person that our objectives or plans will be achieved.
Risks
and
uncertainties that could cause actual results to differ from our forward-looking
statements include those discussed under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations—Risk Factors That
May Affect Future Results of Operations" and elsewhere in this
report.
Should
any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, estimated or expected. We undertake
no
obligation to update our forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
PART
I
When
used
in this report, the terms "Company", "we", "our", and "us" refer to WinWin
Gaming, Inc. and its consolidated subsidiaries, including the operating
subsidiaries of Win Win, Inc. (the “Lottery Subsidiary”), Win Win Consulting
(Shanghai) Co. Ltd. (“Win Win Shanghai”), and Pixiem, Inc. (“Pixiem”). Also, we
have assumed a conversion rate of 8 Chinese Yuan Renminbi (“RMB”) per USD and a
conversion rate of 1,014 Korean Won (“KRW”) per USD throughout this annual
report in all instances where such currency conversions are
required.
ITEM
1.DESCRIPTION
OF BUSINESS.
Background
Our
corporate name is WinWin Gaming, Inc. We were incorporated on December 30,1992in
Delaware. Since inception, prior management had operated different businesses
under the following names: Lone Star Casino Corporation, LS Capital Corporation,
Eurbid.com, Inc. and Junum Incorporated. In March 2003, we acquired Win Win,
Inc., a Nevada corporation, and shortly thereafter began to operate under the
name WinWin Gaming, Inc. We conduct our operations through our wholly-owned
operating subsidiaries, Win Win, Inc., a Nevada corporation, Win Win Consulting
(Shanghai) Co. Ltd., a company organized under the laws of the People’s Republic
of China (“PRC”); Win Win Holding Limited, incorporated in Hong Kong; Shanghai
E-BEAR Digital Mobile Software Inc., a PRC Corporation; Pixiem, Inc a New Jersey
corporation; and Pixiem, Inc., a South Korean subsidiary of Pixiem, Inc. Our
executive offices in the United States are located at 8687 W. Sahara, Suite
201,
Las Vegas, Nevada89117. Our telephone number is (702) 212-4530.
General
Corporate Overview
We
are a
multi-media developer and publisher of sports, lottery and other games. We
have
two business segments. Our primary business now involves developing and
publishing mobile games through our subsidiaries, Pixiem and E-BEAR. Our other
business segment involves providing consulting services to the Shanghai Welfare
Lottery Issuing Center in connection with the sales, marketing and operation
of
an instant ticket lottery in Shanghai. We
consider all of our operations presently to be in the development
stage.
Wireless
Game Business Segment
General
Pixiem:
In
2005,
we acquired Pixiem, Inc. and entered the business of developing and publishing
mobile sports games. Pixiem’s mobile games utilize well-established,
recognizable brands that we license from third parties. Our current licensed
brands include, among others, Yamaha, Wimbledon, ESPN X Games, and Jeanette
Lee.
We
have
agreements with nine wireless carriers and third-party publishers to distribute
our mobile games in the United States, Europe and China. These wireless carriers
include most of the regional and all of the national U.S. wireless carriers
(such as Alltel, Cingular/AT&T Wireless, Nextel, Sprint PCS, T-Mobile and
Verizon Wireless) as well as most of the major wireless carriers operating
elsewhere around the world (including Vodafone, O2, Orange, T-Mobile,
Telefonica, Hutchinson 3, TIM China Mobile, China Unicom, SK Telecom, KTF,
KDDI
and Docomo).
Our
customers purchase our games directly from their mobile phones by downloading
our games through a wireless carrier's branded e-commerce service. Each time
one
of our customers purchases a game, that customer is charged either a one-time
or
monthly subscription fee which appears on his or her mobile phone bill. The
wireless carriers retain a percentage of the fee and remit the balance to
us.
E-BEAR:
In
2005,
we also acquired E-BEAR, a Chinese mobile games content developer that develops
quality mobile games for the Chinese market. Our customers purchase our games
directly from their mobile phones by downloading our games through China’s
wireless service providers (SPs). Each time a customer purchases a game, that
customer is charged a one-time subscription fee which appears on his or her
mobile phone bill. The wireless SPs retain a percentage of the fee and remit
the
balance to us. E-BEAR’s product categories including, but is not limited to,
action games, puzzle, and role-playing games. Sometime in 2006, E-BEAR intends
to deliver services through consulting, porting, and providing quality assurance
services.
E-BEAR’s
games are being marketed through local China SPs (DigiFun, Tencent, Eshoui,
Raymobile, Shanghai Linktone, Beijing Mapps, MIG, Netease, Sina, and Hurray
Enterprise) and publishers outside of China, specifically Taiwan and Europe
(IASolution, MTI, IEC, Digital River, Globaltainment, Dragon Talent
Technologies, Tecwah, Telcogame Asia, Touchlink, and Cellent.
2
Principal
Products and their Markets
Utilizing
our licenses, we had released in 2005 a total of six games titles:
Wimbledon
2005 -
Our
Wimbledon tennis game where players play tennis with various levels of speed,
strategy and skill;
ESPN
X Games Inline Skate - Our
Inline Skating action game, with players learning Inline Skating skills and
techniques;
ESPN
X Games Skateboarding
- A
skateboarding game with players finishing six stages of world
courses;
Jeanette
Lee the Black Widow
-
Jeanette Lee The Black Widow branded Nineball pool game learning various skill
of Nineball, with a quick game mode and a tournament mode;
ESPN
X Games Gliding
- A
gliding game, challenging players to achieve gliding over different terrains
and
enter a tournament in New York City; and
Gostop
- A
popular Korean card game in Korea.
In
the
first quarter of 2006, we released three game titles:
ESPN
Snow MotoX
- An
ESPN X game branded Snow MotoX, competing moto racing on snow mountains with
various Moto tricks to enhance excitement;
ESPN
Snowboarding
- An
ESPN X game branded snowboarding, competing across the world in various mountain
terrains;
ESPN
Pro Rodeo -
A Pro
Rodeo mobile game, with players riding a bull during judged events, bonus
events, and timed events;
In
the
second and third quarter of 2006, we are planning to release three additional
games
ESPN
Downtown Dash
- An
ESPN X game branded Downtown Dash, similar to popular European sports called
Free Running, players use various tricks without using any equipment to jump,
climb and rollover between buildings and obstacles;
Wimbledon
2006 2D
- A
Wimbledon branded tennis games offers various tennis courts. Clay, Hard, Street
and Grass courts require different shot selections and serve power to win the
Wimbledon Championship;
Wimbledon
2006 3D
- A
Wimbledon branded tennis game offers real feel of the tennis game with different
camera angles and movements to offer a high visual effect; and
Pixiem’s
mobile sports games are sold in the United States and internationally. During
the fiscal year ended December 31, 2005, approximately 43.23%, 56.41% and 0.36%
of Pixiem’s sales, which totaled $139,478, were made in Europe, the United
States, and Asia, respectively. E-BEAR’s games are sold only in China. During
the fiscal year ended December 31, 2005, E-BEAR’s sales were
$54,411.
In
total,
E-BEAR has developed approximately 60 games and approximately half of them
are
currently being sold in China and external markets through SPs and publishers,
generating limited revenue. We currently have five games in progress, mostly
upgrades to our existing series of games launched in China.
3
Product
Development
Through
our research and development activities, we are constantly developing and
publishing new games. One of our current development focuses is tournament
enabled games. Tournament enabled games allow multiple players to play against
each other from separate mobile handsets. Tournament enabled games can also
offer prizes to the winning players. Other areas of development include, 3D
graphics rendering engines and player community features. Our research and
development expenses, which are generally comprised of the costs of developing
new game engines, for the year ended December 31, 2005 were approximately
$818,975. We did not have any research and development costs during the fiscal
year ended December 31, 2004, which was prior to our acquisition of
Pixiem.
We
develop our games at the Pixiem Game Studio in Seoul, South Korea. Our game
studio employs software engineers, graphic artists and game designers who create
our games. We also employ porting engineers whose work enables our games to
be
deployed or played on various models of mobile handsets. In some instances,
we
will also contract with third-party developers to create game applications
for
us and we coordinate production based on specifications that we provide. We
also
contract with third-party porting companies who perform most of the porting
work
for us.
Marketing
Our Products
To
date,
we have engaged in only minimal sales and marketing activities. Our sales and
marketing staff has mainly worked directly with wireless carriers in the United
States, Europe and Asia to create marketing opportunities for our games. We
plan
to formalize and otherwise enhance our marketing program in 2006. We expect
to
begin marketing and advertising, presenting at industry trade shows, and using
our website to develop new sales channels and marketing opportunities. We expect
to hire at least two new sales and marketing personnel in 2006, and we expect
that our sales and marketing expenses will increase substantially in
2006.
Competition
The
wireless game market is highly competitive and characterized by frequent product
introductions, evolving wireless platforms and new technologies. As demand
for
these mobile games continues to increase, we expect new competitors to enter
the
market and existing competitors to allocate more resources to develop and market
applications. As a result, we expect competition in the wireless game market
that we operate in to intensify.
We
compete with larger companies who are wireless mobile game developers like
us,
as well as with wireless content aggregators, who pool applications from
multiple developers (and sometimes publishers) and offer them to carriers or
through other sales channels. Unlike us, aggregators do not typically fund
development, provide design input or provide quality assurance for their
applications.
Currently,
we consider our primary competitors to be Electronic Arts/Jamdat, Gameloft,
Infospace, Mforma, and Glu Mobile. All of these competitors have greater
licensing resources, broader geographic presence and a greater market share
than
we do.
Our
ability to successfully complete in the market will largely depend on our
ability to leverage our present strong relationships with wireless carriers
and
our licensing arrangements with owners of recognizable brands.
4
Intellectual
Property
We
use
proprietary software code, content (i.e., the audio and visual elements of
the
game) and other technology to develop our games and to make them run properly
on
the game platforms.
We
do not
currently have any patents, trademarks or copyrights; however, we anticipate
obtaining trademarks for our game titles. We may attempt to keep our proprietary
intellectual property (mobile games) as a trade secret to protect it from
unauthorized copying or other infringement.
Our
employees and independent contractors in China and Korea are required to sign
agreements acknowledging that all inventions, trade secrets, works of
authorship, developments and other processes generated by them on our behalf
are
our property, and assigning to us any ownership that they may claim in those
works. Despite these precautions, it may be possible for third parties to still
obtain and use without consent intellectual property that we own or
license.
In
addition, many of our applications are based on or incorporate intellectual
properties that we license from third parties. We have both exclusive and
non-exclusive licenses to use these properties for terms that range from one
to
five years. Our licensed brands include, among others, Yamaha,Wimbledon,
ESPN & X Games, and Jeanette Lee.
Lottery
Services Business Segment
General
We
operate our lottery services business segment through our wholly-owned China
subsidiary, Win Win Consulting (Shanghai) Co. Ltd. (“Win Win Shanghai”). Our
operations in 2005 consisted of providing consulting services to the Shanghai
Welfare Lottery Issuing Center (“SWLIC”). SWLIC is a governmental authority that
is in charge of the China Welfare Lottery games in the Shanghai municipal
district of China. We advise the SWLIC on the creation, design, marketing and
sale of instant win scratch off lottery tickets.
We
developed the Slam Dunk game concept and marketing plan for the SWLIC. In July
2004, SWLIC launched the "Slam Dunk" instant ticket games in Shanghai. A year
later, in July 2005, however, ticket sales were terminated by us for economic
(poor operating results) and other reasons. A primary reason for the poor
operating results was the lack of lottery distribution centers in Shanghai
that
could read or scan our tickets. These distribution centers were unable to change
over to lottery terminals that could read and process our bar-coded Slam Dunk
lottery tickets.
We
then
began focusing on the development of new Slam Dunk II (“SD II”) games for
deployment in Shanghai and potentially in other provinces in China. On September21, 2005, Win Win Shanghai entered into a Cooperation Contract (the “SD II
Contract”) with the SWLIC. Pursuant to the SD II Contract the SWLIC retained Win
Win Shanghai to create, design, market and otherwise promote the sale of a
second generation of instant scratch off lottery tickets, using our “Slam Dunk”
brand and trademark (the “SD II Tickets”). Under the terms of the SD II
Contract, Win Win Shanghai will receive 1.65% of the gross revenues of the
sale
of the SD II Tickets. We also expect to derive revenue from second-chance games
played through an Interactive Voice Recorder (IVR) system (i.e., a pay-per-call
dial up system where players of our SD II Instant Ticket game play a second
chance game, by calling in on a toll number listed on the SD II ticket. These
players of the second chance games answer questions over their mobile handset.
and become eligible to win other prizes). We expect our revenue margins from
the
second-chance games to be a minimum of 35-40% of the total IVR game revenue,
however, we will be responsible for funding the payouts and other prizes
associated with the second-chance games.
The
new
second generation Slam Dunk lottery is expected to launch sometime in 2006
and
the SWLIC indicated in the SD II Contract that it expects to have over 2,000
lottery distribution outlets, with either the proper lottery terminals to scan
or process our tickets, or our tickets will be pre-scanned prior to distribution
into these locations, for our new Slam Dunk II tickets.
5
Our
Principal Products, Services and Markets
Win
Win
Shanghai has developed an instant ticket lottery brand known as Slam Dunk,
that
was deployed by the SWLIC in Shanghai, China. Slam Dunk was designed by
management to take full advantage of the popularity of basketball in Shanghai
and China. We hope that our “thumbs up” logo on the face of the tickets will
become an established brand (which we have trademarked and copyrighted in
China). We utilize bar code technology to ensure that the integrity of the
games
cannot be compromised.
Shanghai,
China is currently the only market where we provide lottery services. We intend
to expand our lottery services operations throughout China. Lotteries have
become a popular form of entertainment in China for many people from all levels
of society. Apart from the lotteries and the MSAR (Macau), virtually no other
form of legalized gambling is permitted in China.
Marketing
our Products
The
primary marketing tool that we are planning to use to market and sell our
lottery tickets is our live, weekly-televised lottery game show. We are
currently incurring all costs to produce the show, which is currently in
process. We also intend to employ standard marketing channels, including TV
commercials, print media, outdoor advertising and radio in the Shanghai
market.
Competition
The
lottery business in Shanghai and throughout China is highly competitive. In
the
lottery gaming services industry, barriers to entry are relatively low and
risk
of new competitors entering the market is high. Most of our existing competitors
have substantially greater resources than we do.
We
believe that GTech, SciGames and various other governmental entities or
government sponsored licensees may be able to compete with us.
Regulation
The
lottery industry is a highly regulated industry and is subject to numerous
statutes, rules and regulations administered by the gaming commissions or
similar regulatory authorities of each jurisdiction that we operate. Generally,
companies that seek to introduce gaming products or concepts into such
jurisdictions may be required to submit applications relating to their
activities or products (including detailed background information concerning
controlling persons within their organization), which are then reviewed for
approval. In this regard, we may incur significant expenses in seeking to obtain
licenses for all of our lottery and gaming products and concepts, and no
assurance can be given that our games and products will be approved in any
particular jurisdiction. In addition, any change to the applicable statutes,
rules and regulations that restricts or prevents our ability to operate could
have an adverse effect on us.
Due
to
extraordinary stock speculation created by Hong Kong listed companies with
contractual relationships with the SWLIC, the Chinese Ministry of Finance
initiated a review of all contracts with foreign enterprises, including the
Company’s executed agreement with the SWLIC, with the view of delaying their
implementation until certain controls can be exercised over those executory
contracts and each vendor can demonstrate that the primary objective of the
contractual relationship can be reasonably accomplished with demonstrable
resources. We will be unable to move forward with SDII until we satisfy the
Chinese Ministry of Finance regarding the objectives of our contract. We cannot
estimate at this time when, if at all, such approval will be obtained. We do
expect that once we are able to obtain and display demonstrable financial
resources to the Chinese Ministry of Finance, we will shortly thereafter be
able
to obtain the necessary approval to launch our SDII lottery with the
SWLIC.
The
acquisition of Pixiem, Inc. in 2005 has given us access to mobile
game
applications and content development capability for the pursuit of
growth
opportunities in the wireless entertainment game market
worldwide;
·
The
acquisition of the ClanPass Tournament System Software from Bijou
Studios,
Inc. will enable full interaction between players using wireless
entertainment systems, as well as creating and managing tournament-related
transactions such as statistics, ranking, full player reports,
year-to-date summaries, prize-enabling, and similar
functions;
·
The
Shanghai E-BEAR Digital Software Co., Ltd. purchase has given us
the
ability to develop wireless mobile game entertainment in
China;
·
PayByTouch
Joint Venture Agreement
On
September 30, 2005, we entered into a Joint Venture Agreement with Solidus
Networks, Inc., d/b/a PayByTouch Solutions (“PBT”). PBT is a one of the leading
providers of biometric transaction solutions with relationships with merchants
and retail chains offering the Company’s biometric/loyalty solutions. Under the
terms of the Joint Venture Agreement, we will provide PBT with the
following:
·
We
will provide reasonable selling support to assist in driving PBT’s
biometric authentication and payment solutions into the Chinese Video
Lottery Terminal (“VLT”) solution that is being prepared by local Chinese
parties and potentially by us in the future, for rollout across
China;
·
We
will provide potential networking contacts in China for the purpose
of
promoting PBT solutions into other applications beyond
VLTs;
·
We
will support from our China management team for tactical and strategic
guidance on PBT’s entry of its biometric technology into China;
and
·
We
will provide physical and logistical support for PBT’s entry into China
and US locations, such as Las
Vegas.
Corporate
Structure
We
are a
Delaware corporation with the following subsidiaries:
·
Win
Win Acquisition Corp. (“Acquisition Corp.”), a Nevada corporation, owns
100% of the outstanding common stock of Win Win,
Inc.
·
Win
Win, Inc., a Nevada corporation.
·
Win
Win Consulting (Shanghai) Co. Ltd., a corporation organized under
the laws
of the People’s Republic of China, is a wholly-owned subsidiary of Win
Win, Inc.
·
Win
Win Wireless, LLC (“Wireless”) is a Delaware limited liability company,
and wholly-owned subsidiary of Acquisition Corp. formed on May 2,2005 to
serve as a holding company for all of the Company’s wireless solutions and
wireless game content subsidiaries.
·
Win
Win Holding Limited was incorporated in Hong Kong on September 17,2005
for the initial purpose of acquiring Shanghai E-BEAR Digital Mobile
Software Inc., an early-stage mobile game development studio located
in
Shanghai.
7
·
E-BEAR
Digital Software Co., Ltd. a Chinese corporation, is a wholly-owned
subsidiary of Win Win Holding,
Limited.
·
Pixiem,
Inc. (“Pixiem”) is a New Jersey corporation which we acquired on May 11,2005. Pixiem was incorporated on January 7, 2004 and is a wholly-owned
subsidiary of Wireless. Pixiem is in the business of designing,
developing, and publishing wireless mobile games for deployment on
mobile
phones in conjunction with mobile phone carriers. Pixiem works with
mobile
phone carriers to distribute its wireless games and
applications.
·
Pixiem
Inc, - South Korean subsidiary of Pixiem, Inc., was formed on April1,2005 to develop all of the Pixiem mobile game
software.
Employees
As
of
February 22, 2006, we have a total of 124 employees. We have 12 full-time
employees and one part-time employee at our Las Vegas, Nevada location, all
of
whom are either part of our management team or provide administrative or
business development support to our subsidiary operations. We have
52employees
in our Shanghai, China office, all of whom are in operations, marketing, sales,
accounting, and administration. We have five full-time employees and two
part-time employees at our Pixiem New Jersey offices, and 58 employees at our
Pixiem Korea offices, all of whom are in programming, product design,
operations, marketing, sales, accounting, and administration.
None
of
our employees is represented by a labor union, and management considers our
relationships with our employees to be satisfactory at the present time. Our
ability to achieve our operational and financial objectives depends in part
upon
our ability to retain key technical, marketing and operations personnel, and
to
attract new employees as required to support growth.
In
addition, we rely on consultants to a significant extent to supplement our
regular employee staff in certain key functional areas and to support management
in the execution of our business strategy. These consultants are independent
contractors.
Our
executive offices occupy approximately 4,000square
feet of space at 8687 W. Sahara, Las Vegas, Nevada89117. As of December 2005,
we had 18 months remaining on our Las Vegas office lease at a monthly rental
rate of approximately $6,000 not including utilities. This office space consists
of administrative offices, conference rooms and a reception area.
The
office of Win Win Shanghai consists of 1,236 square meters, located in the
Pudong District of Shanghai. We entered into a new lease on August 1, 2005,
which will expire on September 30, 2011. The current rental rate is
approximately $7,400 per month, which does not include utilities.
The
offices of Pixiem, Inc. in the United States occupy approximately 3,500 square
feet at 115 River Road in Edgewater, New Jersey. The current lease was entered
into on July 8, 2005 for a three-year term ending July 31, 2008, with a rental
rate of approximately $6,000 per month, not including utilities.
The
offices of Pixiem, Inc. in South Korea consist of a total of 8,280 square feet
on two floors of the Emerald Building in Seoul, South Korea. The current leases
expire on May 31, 2007, with a total rental rate of approximately $13,300 per
month, not including utilities.
We
believe that the office space described above, is satisfactory for its intended
use and sufficient for us to operate our business.
8
ITEM
3. LEGAL PROCEEDINGS.
We
have
previously reported that in February 2003 David Coulter, former Chief Executive
Officer and majority stockholder of Junum, Inc. had filed several civil actions
against the Company and others in the Superior Court of the State of California
for the County of Los Angeles (Central District), and in the County of Orange,
California seeking more than $3 million in damages and other relief. The claims
filed in Orange County originally alleged unauthorized removal from the board
of
directors and breach of fiduciary duty. The claims filed in LA County alleged
a
breach of an employment contract, labor code violations, breach of a covenant
of
good faith and fair dealing, breach of a $1 million promissory note, and
intentional and negligent interference with prospective business and economic
advantage. The Company filed counter-claims against the former CEO for breach
of
fiduciary responsibilities and conversion, for which it is seeking damages.
The
original Orange County complaint became moot as a result of action taken by
the
Company’s shareholders. The LA County complaints were consolidated into one
action and the former CEO subsequently filed an amended complaint alleging
only
a breach of an employment contract, conversion, imposition of a constructive
trust and labor code violations, and sought damages in excess of $6.5
million.
On
June24, 2005, the LA County Superior Court entered an order denying the former
CEO’s
Motion for Summary Adjudication of his causes of action for alleged breach
of
contract, labor code violations and penalties, through which he had sought
more
than $1.8 million in damages. The Court found that there were numerous triable
issues of material fact, including whether the former CEO’s unsigned written
employment agreement was valid, the terms of such alleged agreement, and, even
if valid, whether the Company had any remaining responsibilities
thereunder.
On
September 15, 2005, the consolidated case was transferred to the Orange County
Superior Court by stipulation of the parties. A case management conference
has
been scheduled for April 20, 2006, at which time a trial date will likely be
set
and where we intend to vigorously defend our position in court. The Company
presently believes that the ultimate settlement of this case will not be
material to our financial condition.
In
a
separate case, David Bernard sued WinWin Gaming, Inc. in the United States
District Court for collection on the following two convertible promissory notes
that had been assigned to him: (1) a convertible promissory note in the amount
of $100,000 dated February 9, 2001 between Junum, Inc. and Banca Commerciale
Lugano; and (2) a convertible promissory note in the amount of $50,000 dated
February 9, 2001 between Junum, Inc. and GTS Gann Trading Services,
Inc.
On
March30, 2006, a settlement was reached whereby we will pay David Bernard $70,000
over an 8 month period of time following the settlement date and issue 200,000
shares of our restricted stock with piggyback registration rights. The total
settlement amount guaranteed in the payout to David Bernard is $210,000, with
any shortfall to be paid with the issuance of additional shares of our common
stock.
WinWin
is
involved in a potential litigation dispute related to rights in the ClanPass
Tournament System acquired by WinWin in an asset purchase agreement with Bijou
Studios, Inc. dated as of July 5, 2005. Several months after the closing, a
third party claimed an interest in the rights to the ClanPass Tournament System.
WinWin has suspended payments due under the asset purchase agreement until
this
matter is settled with the third party. Management feels this will not have
a
material adverse effect on Win Win.
In
addition to the foregoing, from time-to-time we may be involved in other
litigation relating to claims of alleged infringement, misuse or
misappropriation of intellectual property rights of third parties. We may also
be subject to claims arising out of our operations in the normal course of
business. As of the date of this filing on Form 10-KSB, we are not a party
to any such other litigation that would have a material adverse effect on us
or
our business.
There
were no matters submitted to a vote of security holders during the quarter
ended
December 31, 2005.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
Common
Stock
Our
Certificate of Incorporation, as amended, authorizes 300,000,000 shares of
common stock, $.01 par value. As of December 31, 2005, we had 60,440,846 shares
outstanding, which were held by 831 stockholders of record.
Preferred
Stock
Our
Certificate of Incorporation, as amended, authorizes 10,000,000 shares of blank
check Preferred Stock, $0.01 par value. As of December 31, 2005, no shares
of
preferred stock were outstanding.
Our
common stock is quoted on the NASD over-the-counter electronic bulletin board
under the symbol "WNWN.OB". The following table sets forth for the periods
shown, the high and low closing bid prices of our common stock on a per share
basis. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
(1) The
above
tables set forth the range of high and low closing bid prices per share of
our
common stock as reported by Yahoo Finance for the periods
indicated.
On
March1, 2006, the closing price of our common stock was $0.72 per share.
When
the
trading price of our common stock is below $5.00 per share, as it currently
is,
our common stock is considered to be a "penny stock" that is subject to rules
promulgated by the Securities and Exchange Commission (Rule 15-1 through 15g-
9)
under the Securities Exchange Act of 1934. These rules impose significant
requirements on brokers under these circumstances, including: (a) delivering
to
customers the SEC’s standardized risk disclosure document; (b) providing
customers with current bid and ask prices; (c) disclosing to customers the
broker-dealers’ and sales representatives compensation; and (d) providing to
customers monthly account statements. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations - Risk Factors” for more
information regarding penny stocks.
10
Dividend
Policy
We
do not
intend to pay any cash dividends on our common stock in the foreseeable future.
All cash resources are expected to be invested in developing our business plan.
Future dividend payments from Win Win Consulting (Shanghai) Co. Ltd., our
wholly-owned subsidiary in China, to us will be limited by certain statutory
regulations in China. Namely, the approval of the Foreign Currency Exchange
Management Bureau must be obtained prior to the payment to us of any dividend
from Win Win Shanghai. Furthermore, dividend payments to us from Win Win
Shanghai are limited to 85% of profits, after taxes.
Securities
Authorized for Issuance under Equity Compensation
Plans
The
following table discloses information as of December 31, 2005 with respect
to
compensation plans (including individual compensation arrangements) under which
our equity securities are authorized for issuance.
Plan
Category
(a)
Number
of
securities
to be
issued
upon
exercise
of outstanding
options,
warrants
and
rights
(b)
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(c)
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
Equity
compensation plans approved by security holders
(1)
12,012,653
$0.49
7,192,347
Equity
compensation plans not approved by security holders
(2)
3,542,500
$0.52
N/A
Total
15,555,153
$0.50
7,192,347
(1) Consists
of securities available for issuance pursuant to our 2003 Stock Plan, which
has
been approved by our Board of Directors and our stockholders.
(2) Consists
of warrants issued to consultants as compensation for services provided by
such
consultants. These warrants were not issued pursuant to any plan.
Options
The
stock
options issued pursuant to the 2003 Stock Plan to date totaled 12,807,653 of
which 12,012,653 remain outstanding at December 31, 2005
11
Warrants
As
of
December 31, 2005, we had outstanding warrants to purchase 9,476,721 shares
of
common stock at exercise prices ranging from $0.25 to $1.03 per
share.
Registrar
and Transfer Agent
Our
registrar and transfer agent is Integrity Stock Transfer, 2920 N. Green Valley
Parkway, Building 5, Suite 527, Henderson, Nevada89014; telephone (702)
317-7757.
Recent
Sales of Unregistered Securities
Information
regarding unregistered sales of securities by us has been previously disclosed
in quarterly reports on Form 10-QSB or in current reports on Form 8-K filed
during the period January 1, 2005 to October 26, 2005 and is not being repeated
in this annual report.
During
the period October 27, 2005 through April 12, 2006, we issued an aggregate
of
2,730,000 shares of restricted common stock at $.50 per share, to various
individual investors (the “Investors”). The aggregate offering price for the
shares was $1,365,000.
The
Investors executed and delivered to the Company a Subscription Agreement, in
which each Investor made, among others, the following representations: (a)
the
Investor acknowledged that the Shares being acquired will be acquired for the
Investor's own account without a view to public distribution; and (b) the
Investor has indicated that it is an accredited investor and is also
knowledgeable, sophisticated and experienced in making, and is qualified to
make
decisions with respect to, investments in securities presenting an investment
decision like that involved in the purchase of the Shares. Management determined
that each Investor is an Accredited Investor (as defined in Regulation D) and
that each Investor is also a sophisticated investor. As a result of management’s
determination, the issuance of the Shares was effected in reliance on the
exemption from the registration provisions of the Securities Act of 1933
provided by Regulation D, Rule 506.
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATIONS.
Overview
We
have
two business segments. First, we develop proprietary game content for wireless
service providers. Second, we offer a variety of services to government lottery
agencies.
We
entered our two business segments, based on various factors, including the
following:
·
our
perception of the growth opportunities provided by each, particularly
in
our targeted geographic markets;
·
our
assessment of the business and technical capabilities of our management,
professional staff and advisors;
and
·
the
potential synergies that we recognized between the two
segments.
12
Wireless
Game Operations
In
May
2005, we entered this segment through our acquisition of Pixiem, which is
engaged in the development and publication of mobile game content for the
wireless entertainment game market. We believe that the demand for mobile
entertainment is accelerating, and the acquisition of Pixiem will give us access
to key technologies, applications, and content development capability for the
pursuit of growth opportunities in the wireless entertainment game market.
We
also believe that the acquisition of Pixiem may offer us an opportunity to
develop the content for the lottery-related wireless games for introduction
in
China. Pixiem also represents for us a step toward the development, sales,
and
distribution of a broad line of wireless games for a number of regional markets,
and potentially worldwide markets.
At
the
time we acquired Pixiem, its business consisted primarily of the distribution
of
third-party-produced game content, for which Pixiem received commission revenue.
Through our funding to Pixiem starting in March 2005, that business model has
changed, and we are now focused on the development, publishing, and distribution
of our own proprietary lines of games pursuant to licenses or other arrangements
obtained from prominent sources such as the All England Lawn and Tennis Club,
which provided the license for Pixiem's 2005 Wimbledon game; ESPN; Jeanette
Lee,
a world renowned professional pool player; and others.
Our
strategy is to publish a diversified and balanced portfolio of high-quality
applications based on brands that we license from third parties. Our license
agreements for third-party brands typically require that we pay an advance
or
guaranteed royalty payment. We generally recoup all of the advances we have
paid
from royalties earned from sales of the application before the licensor receives
any further royalty payments from us. Presently, when we develop our mobile
games we generally assume the entire cost or responsibility associated with
development upfront. We also have payment terms with most carriers that run
from
60 days to 90 days. The combination of these two factors will continue to have
a
significant negative impact on our cash flow in 2006.
The
primary growth drivers of our business are the number of mobile phones in the
market capable of downloading our mobile games and our ability to deploy our
mobile games to those mobile phones —primarily through our carrier relationships
and our ability to “port” or customize our games so that they meet the
individual mobile phone specifications and can be played on particular mobile
handsets. We are using various third parties to port our mobile games to the
handsets, so that we can deploy them into the market, onto as many of the
highest potential revenue producing mobile handsets as possible, on a timely
basis. We have started an initiative to begin porting our games in China, using
our subsidiary E-BEAR. We anticipate that E-BEAR will commence porting our
mobile games onto the handsets in China in 2006. As a transitioning step towards
E-Bear in-house porting we have recently entered into agreements with two
Chinese Porting companies to service our porting needs at a much reduced per
game and per handset cost over our 2005 fees. We anticipate that this will
reduce our porting costs, due to the lower labor rates in China. Completing
the
transition to E-Bear porting, later this year, will also enable us to deliver
our games timely in 2006 by enabling us to perform these tasks
internally.
To
date,
we have broadly supported mobile phones utilizing BREW and Java as the primary
application environment. We are working to support numerous mobile phone models
and technologies in an effort to reach the maximum number of wireless
subscribers. However, keeping pace with the rapid innovation of mobile phone
technologies together with the continuous introduction of new mobile phone
models by wireless carriers, will require more investment in deployment
capabilities, including personnel, technologies and equipment.
Our
ability to generate revenues and negotiate favorable terms under which we
deliver our applications depends on a number of factors, including our ability
to maintain strong relationships with the carriers and to differentiate our
applications from those of our competitors.
Our
pricing structure and sales model vary by individual mobile game and wireless
carrier (“Carrier”). We offer some of our mobile games on a monthly subscription
basis, while our primary source of revenues currently is through a one-time
purchase option. Subscriptions to our mobile games generally renew automatically
on a monthly basis, and can be terminated by our customers at any time. Although
we have the ability to propose prices to our Carriers, in general, the final
price for our mobile games are established by the Carrier. The Carriers
typically charge $1.49 to $2.99 for mobile games on a monthly subscription
basis
and $3.99 to $7.49 for a one-time purchase option.
13
While
we
have initially focused on building our presence in the United States and Europe,
we believe that the wireless entertainment market is expanding globally and
we
intend to pursue revenue opportunities outside of these markets. In 2006, we
formed a new subsidiary in England and we intend to set up an office in England
which will allow us to expand our reach and distribute our mobile games to
wireless carriers more widely and aggressively throughout Europe. We are also
increasing our presence and are planning to distribute more of our mobile games
in China, India, South Korea and other parts of South East Asia through local
distribution partners in 2006 through our Chinese subsidiary E-BEAR and Pixiem
Korea. We derived approximately 27% of our revenues from international markets
in 2005.
Since
the
inception of Win Win, Inc. on May 10, 2002, we have sought out opportunities
in
the worldwide lottery industry. In December, 2003, we entered into an agreement
with the Shanghai Welfare Lottery Issuing Center, (“SWLIC”), which operates the
Shanghai Welfare Lottery, (“SWL”), to develop the first of our instant ticket
games utilizing our Slam Dunk
brand for SWLIC which was launched during July 2004. Our
SWL-derived revenue was substantially below our initial expectations and we
terminated our lottery sales during July 2005. During
the period from July 11, 2004 (the launch of our initial Slam Dunk Lottery
game
in Shanghai) through June 30, 2005 (the date of termination of Slam Dunk sales
in Shanghai), we generated only approximately $8,400 in revenue as a result
of
our lottery activities in Shanghai. However,
we are optimistic that our start-up efforts to date, and the business
associations we have established, along with the necessary approvals required
by
the Ministry of Finance in China, will enable us to re-establish and expand
our
lottery activities within China in 2006.
Although
we terminated our first Slam Dunk lottery game in Shanghai, we fulfilled all
of
our remaining contractual commitments with the SWLIC. We are currently focusing
all of our efforts on launching a suite of new Slam Dunk II instant ticket
games
for potential deployment in Shanghai other provinces in the China market. We
also expect to derive revenue from the second-chance games played through an
Interactive Voice Recorder system, as previously described under Item 1,
Description of Business.
Due
to
extraordinary stock speculation created by Hong Kong listed companies with
contractual relationships with the SWLIC, the Ministry of Finance initiated
a
review of all contracts with foreign enterprises, including the Company’s
executed agreement with the SWLIC, with the view of delaying their
implementation until certain controls can be exercised over those executory
contracts and each vendor can demonstrate that the primary objective of the
contractual relationship can be reasonably accomplished with demonstrable
resources. We will be unable to move forward with SDII until we satisfy the
Chinese Ministry of Finance regarding the objectives of our contract. We cannot
estimate at this time when, if at all, such approval will be obtained. We do
expect that once we obtain and display demonstrable financial resources to
the
Chinese Ministry of Finance, we anticipate shortly thereafter being able to
obtain the necessary approval to launch our SDII lottery with the
SWLIC.
Plan
of Operations
As
described in our 2005 consolidated financial statements, and the following
discussion of our “Liquidity and Capital Resources”, “Results of Operations”,
and “Risk Factors”, the principal factor that has negatively impacted our
current ability to develop and expand our business segments has been a lack
of
working capital. Through recent sales of restricted stock in private placements,
we have been able to pay our ongoing recurring monthly expenses to date. Our
existing loan from PBT in the principal amount of $2,500,000 is due on April30,2006. We will continue our efforts to raise capital from private placement
transactions of our debt and equity financings with accredited investors and
possibly through public offerings to improve our working capital position for
the next quarter and for future periods. Additional funds will be required
during 2006 in order for us to meet our obligations and continue our operations
in 2006. See Item 7 of Part II, “Financial Statements—Note 2 —Capital Resources
and Going Concern”.
As
of
April 14, 2006, we had cash of approximately $50,000. As of such date, we
had
total current liabilities that significantly exceed our total available cash.
Further, the majority of our April payroll will be due by April 28, 2006.
Unless
we are able to obtain financing, we will not be able to pay our current
liabilities, and we will not be able to satisfy our current payroll obligations.
Accordingly, we will likely be forced to reduce our workforce and maintain
only
minimal operations until we are able to obtain financing. Our lack of cash
may
have a direct negative impact on our operations and the results thereof.
As
of
April 14, 2006, we are negotiating with an investment group to obtain funding
of
up to $2 million. We are also negotiating with an investment banking firm
to
obtain assistance in raising additional capital. There can be no assurance
that
we will be successful in completing any of these transactions or obtaining
such
additional capital and we have no binding commitments to obtain any
capital.
The
following table summarizes the results of our consolidated operations during
the
fiscal years ended December 31, 2005 and 2004 and provides information regarding
the dollar and percentage increase or (decrease) from the current fiscal year
to
the prior fiscal year:
Line
Item
12/31/05
12/31/04
Increase
(Decrease)
Percentage
Increase
(Decrease)
Revenues
$
196,523
$
13,987
$
182,536
1,305
%
Cost
of sales
121,844
-
121,844
-
Gross
profit
74,679
13,987
60,692
434
%
Selling,
general and administrative
expenses
6,734,240
3,193,237
3,541,003
110
%
Stock-based
compensation expense
1,023,717
4,460,016
(3,436,299
)
(77
)%
Research
and development
costs
and acquired in-process research and development
1,436,975
-
1,436,975
-
Total
operating expenses
9,194,932
7,653,253
1,541,679
20
%
Operating
loss
(9,120,253
)
(7,639,266
)
1,480,987
19
%
Changes
in fair value of warrants
(610,792
)
-
610,792
-
Currency
translation gain
1,259
5,297
(4,038
)
(76
)%
Interest
income (expense)
(79,275
)
6,677
(85,952
)
(1,287
)%
Total
other income (expense)
(688,808
)
11,974
(700,782
)
(5,853
)%
Loss
before extraordinary item
(9,809,061
)
(7,627,292
)
2,181,769
29
%
Extinguishment
of debt
-
598,229
(598,229
)
(100
)%
Net
income (loss)
$
(9,809,061
)
$
(7,029,063
)
$
2,779,998
40
%
Earnings
(loss) per share of common
stock
(0.19
)
(0.18
)
During
the fiscal year ended December 31, 2005, we incurred a net loss of $9,809,061
as
compared to a net loss of $7,029,063 for the prior year. This represents a
40%
increase in net loss from last year to this year. During the period from
inception (May 10, 2002) through the end of fiscal year 2005, we have incurred
a
loss of $21,488,234. For further information on our cumulative loss of
$21,488.234, see Item 7 of Part II, “Financial Statements”, Consolidated
Statement of Operations.
15
Revenue
Overview
The
following table summarizes the contribution to consolidated revenue by each
of
our Company’s business segments:
Years
Ended December 31,
Cumulative
Amounts Since May 10, 2002 (Inception) to
The
revenue derived from our Pixiem wireless game operations and our
China
(E-BEAR) operations.
·
We
expect Pixiem’s wireless games revenues to increase in future periods due
to our launch and deployment of additional mobile games in 2006 to
the
wireless carriers and an increase in our marketing efforts to promote
our
games.
Cost
of
Sales increased $121,844 due to:
·
The
revenue share we paid in accordance with our licensing agreements
and the
amortization expense of the upfront license fees
paid.
Selling,
General and Administrative Expenses increased $3,541,003 due primarily
to:
·
A
net increase in expense for our U.S. operations in the amount of
$1,007,712. The increase in costs is related to the hiring of additional
staff, consultants and professional fees. Some individual expense
components for the increase in costs for the year are as
follows:
·
Payroll
expenses and related fringe benefits increased $476,312 due to the
hiring
of additional key management and
staff
·
Professional
fee expense increased $203,859 due primarily to the acquisitions
of
Pixiem, E-BEAR, ClanPass, and Win Win Holding, Limited and other
legal
matters.
·
Travel,
business development, and public relations expense increased
$96,429
·
Consulting
expense increased $231,112, which included costs associated with
the China
television show
16
·
A
net increase in expenses for our China operations of $634,121 was
due
primarily to an increase in salaries, consulting fees, and other
general
operating expenses
·
Expenses
relating to our Pixiem operations totaled $1,899,170 from the date
of
acquisition May 11, 2005. This consists primarily
of:
·
Payroll
expenses and related fringes of
$503,059
·
Professional
fees of $261,645
·
Travel
expenses of $207,866
·
Marketing
expenses of $119,963
·
Office
expenses of $400,094, including telephone, printing, rent, taxes,
utilities, overhead meals, and
supplies
We
expect
that our Selling, General and Administrative expenses will increase in 2006,
due
to our present plan to expand our lottery and mobile game operations as well
as
potentially enter into some joint venture or other agreements with third
parties.
Stock-Based
Compensation Expense:
·
Decreased
due to the decrease in valuation of our stock, which decreased our
valuations of stock and stock equivalents issued, using the Black
Scholes
valuation model.
Our
implementation of SFAS No. 123R (a modification to the existing standard -
SFAS
No. 123) in 2006 (see notes to the financial statements), will change the way
we
account for Stock-Based Compensation in 2006, and will require us to record
expenses for equity instruments for which we would not have been required under
SFAS No. 123.
Research
and Development Costs:
·
Increased
$1,436,975 due to the development of our wireless mobile game operations.
Included in research and development are in-process research and
development of $618,000 which was allocated as part of the acquisition
cost of Pixiem, as acquired in process research and development
costs.
We
expect
Research and Development costs to increase in 2006, due to having our Pixiem
operations and E-BEAR operations included in our operating results for a full
year.
Changes
in Fair Value of Warrants:
·
We
recorded a warrant liability in the amount of $610,792 for the fair
value
of warrants accruing under a “Trigger Event” associated with the
Securities Purchase Agreement (the “SPA”) entered into on February 25,2005 (see
Item 7 of Part II, “Financial Statements—Note 10 —Stockholders’
Equity”).
17
Balance
Sheet Items
As
of
December 31, 2005, we had total current assets of $745,497, of which $582,951
was cash; total assets of $3,816,340; total current liabilities of $2,998,584;
and total stockholders’ equity of $206,964.
Changes
in our balance sheet items reflect, among other things, (i) the inclusion of
the
assets and liabilities of Pixiem and E-BEAR, (ii) the addition to our cash
from
our sale of common stock, net of amounts expended for our operations and loans
to Pixiem and China, and (iii) the warrant liability for the fair value of
warrants accruing pursuant to a Securities Purchase Agreement (“SPA”) entered
into on February 25, 2006 (see
Item 7
of Part II, “Financial Statements—Note 10 —Stockholders’ Equity”).
Cash
Flows
We
used
$6,516,980 in cash from our operating activities during the year ended December31, 2005 as compared to $3,015,119 used in the prior year. The difference of
$3,501,861 or a 116% increase, is attributable to the following
factors:
·
Expenses
relating to being in the development stage with respect to the
establishment of operations in China and
Korea
·
Increased
overhead expenses attributable to the addition of key management
and
staff; and
·
Additional
expenses related to our development stage wireless
operations
We
used
$1,312,819 in cash from our investing activities during the year ended December31, 2005 as compared to $370,965 used in the prior year. This increase is due
primarily to the purchase of property and equipment for our new offices and
operations for Pixiem and Win Win Shanghai in 2005.
We
received $8,086,000 from financing activities during the year ended December31,2005 as compared to $3,362,500 during the prior year. This increase is due
primarily to an increase in sales of our securities through private placements
in 2005 and the receipt of $1,000,000 from short-term note payable.
For
further information on the cumulative cash flows from May 10, 2002 (Inception)
to December 31, 2005, see Item 7 of Part II, “Financial Statements”,
Consolidated Statements of Cash Flows”.
Liquidity
and Capital Resources
Operations
to date have been primarily financed by debt and equity transactions. As a
result, our future operations will continue to be dependent upon the successful
completion of additional debt or equity financing and the timing and terms
thereof, as well as support of principal stockholders. We will need immediate
financing to continue our operations in the second quarter of 2006.
Implementation of our business acquisition and growth strategies has increased
our need for working capital if we are to be able to seek out and capitalize
on
available business opportunities and attain our intended growth. Our financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts nor to amounts and classifications
of
liabilities that may be necessary should we be unable to continue as a going
concern.
18
We
had
$582,951 in cash and cash equivalents as of December 31, 2005. As of such date,
we also had total current assets of $745,497 and total current liabilities
of
$2,998,584, giving us negative working capital of $(2,253,087). As of such
date,
we also had total assets of $3,816,340 and total liabilities of $3,609,376;
we
have an accumulated deficit from operations of $(21,488,234).
For
further information on Liquidity and Capital Resources, see Item 7 of Part
II,
“Financial Statements”; Note 2 - “Capital Resources and Going Concern,” and Note
10 - “Stockholders’ Equity”.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures
of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
·
accounting
for expenses in connection with stock options and warrants by using
the
Black-Scholes option pricing
method;
·
purchase
accounting related to our
acquisitions;
·
valuation
of contingent liabilities, including all those from Junum,
Inc.
Management
relies on historical experience, legal advice and on assumptions believed to
be
reasonable under the circumstances in making its judgment and estimates. Actual
results could differ materially from those estimates.
The
consolidated financial statements include the accounts of Win Win, Inc., prior
to the business combination with WinWin Gaming Inc. and its subsidiaries,
including some wholly-owned and majority-owned subsidiaries that were inactive
and do not have any assets or liabilities.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangement or commitment that will have a current
effect on our financial condition, changes in financial condition, revenues
or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Inflation
We
believe that inflation has not had a material impact on our results of
operations for the years ended December 31, 2005 or December 31,2004.
Seasonality
We
may
experience seasonal variations in revenues and operating costs due to
seasonality, however, we do not believe that these variations will be
material.
Risk
Factors That May Affect Future Operating Results
There
are
several material risks associated with WinWin Gaming and all of our
subsidiaries. You should carefully consider all the risks and uncertainties
described below, which constitute some of the material risks relating to WinWin.
If any of the following risks are realized, our business, operating results
and
financial condition could be harmed and the value of our stock could go
down.
19
ECONOMIC
RISKS
Our
business is difficult to evaluate because we have a limited operating history
and a history of losses.
We
have a
limited operating history. You must consider the risks and difficulties
frequently encountered by early development stage companies in new and rapidly
evolving markets, particularly those involved in the lottery and wireless game
industries. We expect our operating expenses to increase significantly,
especially in the areas of development, marketing and promotion.
We
have
suffered losses since our formation and we anticipate that we will lose money
in
the foreseeable future. Accordingly, we may not be able to achieve profitable
operations.
Our
losses from inception through December 31, 2005 are $21,488,234. We expect
to
encounter difficulties as an early development stage company in the rapidly
evolving lottery and gaming markets. We expect to incur significant operating
and capital expenditures and, as a result, we expect significant net losses
in
the future. We will need to generate significant additional capital and revenues
to achieve and maintain profitability. We may not be able to achieve profitable
operations in future periods.
We
may have liabilities resulting from predecessor business operations that could
have an adverse effect on us.
We
are
responsible for the liabilities of all of WinWin Gaming, Inc.’s predecessor
business operations. There may be unknown liabilities associated with our
predecessor business operations. If any such unknown liabilities become actual
liabilities, our financial condition and operations would be adversely affected.
In addition, if any such unknown liabilities become actual liabilities or actual
claimed liabilities, we may incur material costs in connection with defending
lawsuits relating to such liabilities. We estimate that the total amount of
liabilities relating to predecessor business operations is $210,000 and have
established a reserve on our balance sheet at December 31, 2005 in such amount
and we believe such reserve is adequate.
We
will need to raise immediate additional financing to fund our operations.
Additional financing may not be available to us on favorable terms or at
all.
We
will
need to raise immediate additional capital to fund continued operations. We
will
also require additional financing to:
•
further
develop products, services and technology that we plan to offer to
governmental and charitable customers and to expand our products
in the
wireless games entertainment
market;
•
fund
additional marketing expenditures;
•
hire
additional personnel;
•
respond
to competitive pressures; and
•
working
capital.
If
we
raise additional funds through the issuance of equity or convertible debt
securities, it will reduce the percentage ownership of our present stockholders.
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. The terms of securities we issue in the future
could
also impose restrictions on our operations. If adequate funds are not available
or are not available on acceptable terms, our ability to fund our operations,
take advantage of unanticipated opportunities, develop or enhance our products
and services or otherwise respond to competitive pressures, would be
significantly limited.
20
REGULATORY
RISKS
The
Chinese Ministry of Finance is reviewing our contract with the SWLIC. As a
result our SD II lottery operations are temporarily on hold. If the hold is
not
lifted, then we may need to seek other third parties to joint venture with
in
order to continue our lottery operations in China.
Due
to
extraordinary stock speculation created by Hong Kong listed companies with
contractual relationships with the SWLIC, the Chinese Ministry of Finance
initiated a review of all contracts with foreign enterprises, including the
Company’s executed agreement with the SWLIC with the view of delaying their
implementation until certain controls can be exercised over those executory
contracts and each vendor can demonstrate that the primary objective of the
contractual relationship can be reasonably accomplished with demonstrable
resources. We will be unable to move forward with SDII until we satisfy the
Chinese Ministry of Finance regarding the objectives of our contract. We can
not
estimate at this time when, if it all, such approval will be obtained.
One
of
the factors that the Chinese Ministry of Finance will focus on is our financial
resources and ability to perform our obligations under our SWLIC contract.
Currently, we do not have the financial resources that we need to satisfy our
obligations under this contract. If we are unable to obtain such financial
resources, then we may need to partner or joint venture with other third parties
that have sufficient resources. If we fail to find suitable partners or partners
that are willing to work with us on terms satisfactory to us, we may lose our
opportunity to work with the SWLIC.
We
face extensive regulation from gaming and other government
authorities.
The
lottery and gaming industry is a highly-regulated industry and is subject to
numerous statutes, rules and regulations administered by the gaming commissions
or similar regulatory authorities of each jurisdiction that we operate.
Generally, companies that seek to introduce gaming products or concepts into
such jurisdictions may be required to submit applications relating to their
activities or products (including detailed background information concerning
controlling persons within their organization), which are then reviewed for
approval. In this regard, we may incur material expenses in seeking to obtain
licenses for our lottery and gaming products and concepts, and no assurance
can
be given that our games and products will be approved in any particular
jurisdiction. The failure to obtain such approval in any jurisdiction in which
we may seek to introduce our products or concepts could have a material adverse
effect on our business. In addition, any change to the applicable statutes,
rules and regulations that restricts or prevents our ability to operate could
have an adverse effect on us.
BUSINESS
RISKS
Our
operations are subject to intense competition.
There
are
several companies with substantially more resources than we have that are
seeking to develop lotteries in our target markets. Many of our potential
competitors have substantially greater capital, marketing and development
capabilities and human resources than we have and will likely represent
significant competition for us. The foregoing conditions create a rigorous
competitive climate for us and increase the risk that we fail to obtain licenses
in jurisdictions where we plan to operate lotteries or we are unable to compete
successfully with other potential lottery and gaming companies in our target
markets.
21
We
are dependent on certain key personnel.
We
depend
on the services of Patrick Rogers, our Chief Executive Officer; Peter Pang,
our
Executive Vice President and President of China Operations; Mark Galvin, our
Chief Operating Officer, Hongsuk “H.S.” Lee, our President of Pixiem’s
operations, and Sung Lee, our Senior Vice-President of Pixiem’s . operations.
The loss of services of any of these individuals (or other key members of the
management team) could impair our ability to complete the national rollout
of
our products and services or to bring our product offering to a significant
level of consumer acceptance, and could have a material adverse effect on our
business, financial condition, and results of operations. Our success depends,
to a large degree, upon the skills of our senior management team and current
key
employees and upon our ability to identify, hire and retain additional sales,
marketing, technical, and financial personnel. The loss of any of our key
executives, or the failure to attract, integrate, motivate, and retain
additional key employees could have a material adverse effect on our business.
We may be unable to retain our existing key personnel or attract and retain
additional key personnel.
Our
largest target market is in China and there are several significant risks
relating to conducting operations in China.
Our
largest target market is in China. Therefore, our business, financial condition
and results of operations are to a significant degree subject to economic,
political and social events in China.
Governmental
policies in China have impacted our present business and could impact our future
business in Chinas.
Since
1978, China's government has been, and is expected to continue, reforming its
economic and political systems. These reforms have resulted in, and are expected
to continue to result in, significant economic and social development in China.
Many of the reforms are unprecedented or experimental and may be subject to
change or readjustment due to a number of political, economic, and social
factors. We believe that the basic principles underlying the political and
economic reforms will continue to be implemented and provide the framework
for
China's political and economic system. New reforms or the readjustment of
previously implemented reforms could have a significant negative effect on
our
operations. Changes in China's political, economic and social conditions and
governmental policies which could have an impact on our business
include:
·
new
laws and regulations or new interpretations of those laws and
regulations;
·
the
introduction of measures to control inflation or stimulate
growth;
·
changes
in the rate or method of taxation;
·
the
imposition of additional restrictions on currency conversion and
remittances abroad; and
·
any
actions which limit our ability to conduct lottery operations, or
to
acquire or contract with businesses in China, engage in advertising
activities, or market mobile games.
Economic
policies in China could negatively impact our
business.
The
economy of China differs from the economies of most countries belonging to
the
Organization for Economic Cooperation and Development in various respects,
such
as structure, government involvement, level of development, growth rate, capital
reinvestment, allocation of resources, self-sufficiency, rate of inflation
and
balance of payments position. In the past, the economy of China has been
primarily a planned economy subject to one- and five-year state plans adopted
by
central government authorities and largely implemented by provincial and local
authorities. These plans set production and development targets. Since 1978,
increasing emphasis had been placed on decentralization and the utilization
of
market forces in the development of China's economy. Economic reform measures
adopted by China's government may be inconsistent or ineffectual, and we may
not
in all cases be able to capitalize on any reforms. Further, these measures
may
be adjusted or modified in ways that could result in economic liberalization
measures that are inconsistent from time to time, from industry to industry
or
across different regions of the country.
22
China's
economy has experienced significant growth in the past decade. This growth,
however, has been accompanied by imbalances in China's economy and has resulted
in significant fluctuations in general price levels, including periods of
inflation. China's government has implemented policies from time to time to
increase or restrain the rate of economic growth, control periods of inflation
or otherwise regulate economic expansion. While we may be able to benefit from
the effects of some of these policies, these policies and other measures taken
by China's government to regulate the economy could also have a significant
negative impact on economic conditions in China with a resulting negative impact
on our business.
Our
Chinese subsidiary is subject to restrictions on paying dividends and making
other payments to us.
As
a
result of our corporate structure, we will rely substantially on dividend
payments from our subsidiary in China. However, Chinese regulations currently
permit payment of dividends only out of accumulated profits, as determined
in
accordance with Chinese accounting standards and regulations. Our subsidiaries
and affiliated entity in China are also required to set aside a portion of
their
after-tax profits according to Chinese accounting standards and regulations
to
fund certain reserve funds. The Chinese government also imposes controls on
the
conversion of RMB into foreign currencies and the remittance of currencies
out
of China. We may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency. Furthermore, if
our
subsidiary in China incurs debt on its own in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
payments. If we or our subsidiary are unable to receive all of the revenue
from
our operations through these governmental restrictions or contractual dividend
arrangements, we may be unable to properly utilize our working
capital.
Uncertainties
with respect to the Chinese legal system could adversely affect
us.
Our
operations in China are governed by national and local laws and regulations.
Our
Chinese subsidiary is generally subject to laws and regulations applicable
to
foreign investments in China and, in particular, laws applicable to wholly
foreign-owned enterprises. The Chinese legal system is based on written
statutes. Prior court decisions may be cited for reference but have limited
precedential value.
Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the Chinese legal system is
based in part on government policies and internal rules (some of which are
not
published on a timely basis or at all) that may have a retroactive effect.
As a
result, we may not be aware of our violation of these policies and rules until
some time after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and a diversion of resources and
management attention.
Government
control of currency conversion may affect the value of your
investment.
The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China.
We
expect to receive a portion of our revenue in RMB. Under our current structure,
our income, if any, will be primarily derived from dividend payments from our
Shanghai subsidiary. Shortages in the availability of foreign currency may
restrict the ability of our Shanghai subsidiary to remit sufficient foreign
currency to pay dividends or other payments to us, or otherwise satisfy its
foreign currency denominated obligations. Under existing Chinese foreign
exchange regulations, payments of current account items, including profit
distributions, interest payments, and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from
the
State Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate government authorities is
required where RMB is to be converted into foreign currency and remitted out
of
China to pay capital expenses such as the repayment of bank loans denominated
in
foreign currencies. The Chinese government may also at its discretion restrict
access in the future to foreign currencies for current account transactions.
If
the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to utilize
our working capital in the best manner deemed by our Board of
Directors.
23
MARKET
RISKS
A
limited public market exists for the trading of our
securities.
Our
common stock is quoted on the NASD Over-the-Counter Bulletin Board. As a result,
investors may find it difficult to dispose of, or to obtain accurate quotations
of the price of, our securities. This lack of information limits the liquidity
of our common stock, and likely will have an adverse effect on the market price
of our common stock and on our ability to raise additional capital.
Our
stock is a penny stock and there are significant risks related to buying and
owning penny stocks.
Rule
15g-9 under the Securities Exchange Act of 1934 imposes additional sales
practice requirements on broker-dealers that sell non-NASDAQ listed securities
except in transactions exempted by the rule, including transactions meeting
the
requirements of Rule 506 of Regulation D under the Securities Act and
transactions in which the purchaser is an institutional accredited investor
(as
defined) or an established customer (as defined) of the broker or dealer. For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser’s
written consent to the transaction prior to sale. Consequently, this rule may
adversely affect the ability of broker-dealers to sell our securities and may
adversely affect your ability to sell any of the securities you
own.
The
Securities and Exchange Commission regulations define a "penny stock" to be
any
non-NASDAQ equity security that has a market price (as defined in the
regulations) of less than $5.00 per share or with an exercise price of less
than
$5.00 per share, subject to some exceptions. For any transaction by a
broker-dealer involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure is also
required to be made about commissions payable to both the broker-dealer and
the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market
in
penny stocks. Our market liquidity could be severely adversely affected by
these
rules on penny stocks.
ITEM
7. FINANCIAL STATEMENTS.
Our
consolidated financial statements for the fiscal years ended December 31, 2005
and 2004, and the reports thereon of Asher and Company, Ltd. are included in
this annual report.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
During
our two most recent fiscal years, we have not consulted with Asher &
Company, Ltd. on any matter that (i) involved the application of accounting
principles to a specific completed or contemplated transaction, or the type
of
audit opinion that might be rendered on our financial statements, in each case
where written or oral advice was provided, that was an important factor
considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) was either the subject of a disagreement
or
event, as that term is described in item 304(a)(1)(iv)(A) of Regulation
S-B.
On
October 4, 2004, we formally dismissed Livingston, Wachtell & Co., LLP as
our independent registered public accounting firm. Such dismissal was approved
by our board of directors. There were no disagreements on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
24
ITEM
8A. CONTROLS AND PROCEDURES.
An
evaluation was carried out under the supervision and with the participation
of
our management, including Patrick Rogers, our Chairman, CEO and President and
Larry Goldman, our Chief Financial Officer, regarding the effectiveness of
our
disclosure controls and procedures. Disclosure controls and procedures are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Securities Exchange
Act
of 1934, such as this Form 10-KSB, is recorded, processed, summarized and
reported within the time period specified in the Securities and Exchange
Commission’s rules and forms. Based on that evaluation, Mr. Rogers and Mr.
Goldman concluded that our disclosure controls and procedures are effective
to
satisfy the objectives for which they are intended.
There
were no changes in our internal control over financial reporting identified
in
connection with the evaluation performed that occurred during the fiscal period
covered by this report that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting, except for
the
following:
Management
identified a significant deficiency relating to the lack of experience in our
staffing of our Chinese and Korean subsidiary’s accounting departments. In the
fourth quarter of 2005, we hired new accounting personnel in China to begin
to
remedy this deficiency, and in the first quarter of 2006, we hired a full time
VP of Finance to head up our accounting department in China and also hired
an
experienced Finance person in Korea. We feel that both of these hires will
remedy these financial reporting deficiencies.
ITEM
8B. OTHER INFORMATION.
Not
applicable
25
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH
SECTION 16(a) OF THE EXCHANGE ACT.
Director,
President of China operations and General. Counsel
John
Gronvall
48
Director
Monica
Soares
36
Corporate
Secretary, Vice President of Administration
Mark
M. Galvin
48
COO,
Executive Vice President
Larry
Goldman
49
CFO/Treasurer
and Vice President of Finance
Hongsuk
“H.S.” Lee
41
President,
Pixiem operations
Sung
Lee
36
Senior
Vice-President, Pixiem operations
Patrick
O. Rogers
became
our Chairman and CEO on December 5, 2003. He has held the position of President
since March 31, 2003. From March 31, 2003 to December 5, 2003, he also held
the
positions of Treasurer and Secretary. From May 2002 to the present, he has
been
the Chairman of Win Win, Inc., a Nevada corporation acquired by us on March31,2003. From February 2000 to the present, Mr. Rogers has been a marketing
consultant through PM Investments LLC, his marketing company. From August 2000
to May 2001, he was the Chief Executive Officer of PlayersClub.com, a membership
and marketing company. From May 1999 to October 1999, Mr. Rogers was the Vice
President - Marketing of Purchase Pro.com, Inc., a business-to-business e-
commerce company. From July 1998 to May 1999, he was Vice President - Marketing
for eastern Europe for Mirage Resorts, Inc. From June 1998 to May 1999, he
owned
and operated a marketing consulting company, R & M Companies, L.L.C. From
June 1996 to June 1998, he owned and operated Rogers and Associates, Inc.,
a
marketing company. From January 1987 to June 1996, Mr. Rogers held various
executive positions with Players International Inc., including Vice President
-
General Manager of Players Island Resort in Mesquite, Nevada and of Players
Riverboat Casino in Metropolis, Illinois.
Arthur
J. Petrie became
our director on December 5, 2003. He has been in the real estate development
and
investment business for the past 45 years. He is Chairman of the Board of Petrie
Development Corporation, formed in 1976, and General Manager of Asset
Development Services, LLC, a real estate investment company located in Las
Vegas, Nevada. Mr. Petrie also serves on the Board of Directors of Solidus
Networks, Inc. d/b/a PayByTouch. Mr. Petrie’s experience in commercial real
estate includes development for Wal-Mart, Sam’s Club, K-mart, Hy-Vee, and other
retail users, development of apartment complexes, and redevelopment of a
university campus to offices and housing. Mr. Petrie is a General Partner in
several publicly-syndicated partnerships and has extensive experience in
developing companies as a shareholder, member of the board, and officer. Mr.
Petrie has also served on the Mankato State University Foundation and as
Chairman of the Minnesota World Trade Center.
Dwight
V. Call
became
our director on December 5, 2003. He is the President and owner of MCS Foods,
Inc., d/b/a Magee’s, a restaurant, nuts and butters company operating in Los
Angeles, California. He is also the President and Owner of Call and Call, an
accountancy corporation that began operations in 1962. Mr. Call is also a
Professor Emeritus of Accounting and MIS at California State University -
Northridge. He is a frequent lecturer on matters relating to taxation and
accounting and has spoken before the International Business and Economics
Research Conference regarding matters relating to employee stock options. Mr.
Call is also an accomplished author and has written several articles on matters
relating to taxation and accounting.
26
Peter
Pang
became
our director on December 5, 2003. Mr. Pang became our General Counsel and
Executive Vice President on January 1, 2004 and President of Win Win Consulting
(Shanghai) Co. Ltd. in October 2004. He is the founder of IPO Pang, P.C., a
premier international law firm with offices in Guangzhou, People’s Republic of
China and Oakland, California that specializes in assisting U.S. companies
entering the Chinese market with complex, high-profile legal and business cases.
Prior to forming IPO Pang, Mr. Pang served as Vice President and General Counsel
of Dole Packaged Foods, Assistant General Counsel of Nissan North America and
corporate counsel to Hershey Foods Corporation and Shell Oil Company. Mr. Pang
is licensed to practice law in several jurisdictions in the United States,
including California, New York, Pennsylvania and Texas, and is also an
acknowledged Foreign Legal Consultant in China where he has provided legal
advice to the City of Guangzhou and the Ministry of Television and Foreign
Trade
and Economics Commission. Mr. Pang is also an expert on intellectual property
law and is the author of several chapters on protecting Trade Secrets, CEB
2003.
John
Gronvallbecame
our director in August 2004. Mr. Gronvall is in the real estate development
and
investment business and has successfully developed over $50,000,000 in
commercial, residential, office and healthcare projects. Mr. Gronvall has been
the CEO and sole stockholder of International Renaissance Developers and its
affiliated companies since 1979. Mr. Gronvall has served on the board of Junior
Achievement, Leadership Mahoning Valley, and is a member of the Captain’s Club
for the United Way.
Monica
Soares / Senior Vice President Administration, Corporate Secretary
After
successfully owning and operating a restaurant in Hawaii, Ms. Soares traveled
around the world as a spokesperson for Hawaiian Tropic Suncare Products
participating in the promotion of Hawaiian Tropic from 1989 through 1999. In
1999, Ms. Soares became co-founder of PM Investments, a private investment
firm
that invested in several diversified business ventures. Ms. Soares is a
co-founder of the company and since 2002, Ms. Soares has played a key role
in
developing WinWin and is active in all aspects of the day-to-day operations.
Monica Soares and Patrick Rogers are married to each other.
Mark
Galvin, Chief Operating Officer, Executive Vice President
Mark
Galvin brings more than 20 years of domestic and international experience in
the
areas of content development, technical support, production, finance,
operations, and administration for companies engaged in game production,
creative medial, visual effects, and TV/film production. Prior to joining WinWin
in June 2005, Mr. Galvin served as Director of Development for Electronic Arts,
Inc. (EA), the world’s largest publisher of interactive PC-based games. At EA,
he supervised the development and delivery of creative assets for the popular
“Medal of Honor Rising Sun” and “Medal of Honor European Assault” video games.
Prior to EA, Mr. Galvin served as Line Producer at DNA Productions for “The
Adventures of Jimmy Neutron: Boy Genius” animated television series. He also
served as General Manager at Digital Anvil, a PC and X-Box game developer for
a
number of projects including “Freelancer” and “Conquest”, As Executive Producer
for Dream Quest Images, a visual effects company, he supervised projection
for
feature films and television series working with leading companies such as
The
Walt Disney Company, Microsoft, and Fox Films. Mr. Galvin’s film and television
credits include “Crimson Tide”, “Batman Returns”, “The Mask”, “Moses”, and
“JAG”. In addition to the above, he has also supervised international project
teams in five countries including Japan and Korea.
Larry
Goldman, Chief Financial Officer, Treasurer, Vice President of Finance
Larry
Goldman is a certified public accountant with over 20 years of consulting and
technical experience as a partner in a mid-size NYC CPA firm, working with
a
wide variety of companies, assisting them in streamlining their operations
and
increasing profitability. Prior to joining us in October 2004, Mr. Goldman
was a
partner at Livingston Wachtell & Co., LLP and had been with that firm for
the past 19years.
Mr. Goldman has extensive experience in both auditing and consulting with public
companies, and has experience providing accounting and consulting services
to
the Asian marketplace, having audited several Chinese public
companies.
27
Hongsuk
“H.S.” Lee, President of Pixiem Operations Hongsuk
“H.S.” Lee joined Pixiem after six years with ZIO Interactive Korea, an Asian
mobile gaming company founded in 1997. He served as VP of Product Planning
&
Development and in senior sales and marketing capacities. At ZIO he worked
on
game licensing with EA, Disney, and THQ -such as Tiger Woods, Sim City, and
WWE.
His move to Pixiem was based on a desire to bring his mobile game development
expertise across the Pacific to the emerging U.S. marketplace. Prior to ZIO
Korea, H.S. worked for Samsung’s Computer Division for eight years on OEM Sales
and Marketing for Europe and U.S. market. He also holds an MBA from the
University of Missouri at Columbia.
Sung
Lee, Senior Vice-President of Pixiem Operations Sung
Lee’s responsibilities include overall operations, game development, and product
marketing. Prior to joining Pixiem, he worked for Samsung Electronics in the
PC
OEM Sales and Marketing division for the United States. His clients included
IBM, AT&T GIS, Zenith Data Systems, Digital Equipment Corporation., and NCR,
with annual sales of $400 million. In 2002, he served as a wireless content
consultant for Samsung Electronics on PGS Tour and Champion Auto Racing Team
onsite video content delivery system. In 2003, Sung worked as a content sales
and marketing consultant for Summus on delivering wireless mobile games to
U.S.
mobile operators. In 2001, Sung started his own Internet advertising company
specializing in reward programs using Voice Over IP technology.
Audit
Committee Financial Expert
Our
board
of directors has determined that Dwight V. Call, a member of our board,
qualifies as an Audit Committee Financial Expert. The board has also determined
that Mr. Call is an independent director. Our entire board of directors acts
as
our audit committee.
Code
of Ethics
On
February 12, 2004, our board of directors adopted a code of ethics that our
Chief Executive Officer and our Chief Financial Officer and any person who
may
perform similar functions is subject to. We had filed the code of ethics as
exhibit 14 to the 2003 Annual Report on Form 10-KSB.
28
ITEM
10. EXECUTIVE COMPENSATION.
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to Patrick Rogers, our Chief
Executive Officer, and each of the other executive officers, if any, who earned
over $100,000 and was serving at the end of our last fiscal year December 31,2005, for services in all capacities to us.
Annual
Compensation
Long-Term
Compensation
Awards
Payouts
Name
And
Principal
Position
Year
Salary
($)
Bonus
($)
Other
($)
Restricted
Stock
Awards
($)
Securities
Under-lying
Options/
SARs
(#)
LTIP
Payouts
($)
All
Other
Compen-
sation
($)
Patrick
Rogers
2005
260,000
200,000
(1)
0
0
1,000,000
0
0
Chairman,
CEO )
2004
180,000
0
0
225,000
900,000
0
0
And
President(1)
2003
150,000
30,000
0
0
0
0
0
Peter
Pang
2004
195,000
150,000
(2)
0
300,000
(2)
0
0
24,000
(2)
President
of China Operations and
2004
151,024
0
0
1,200,000
(2)
800,000
0
22,200
(2)
General
Counsel
2004
60,618
(2)
0
0
0
0
0
0
Mark
Galvin
2005
117,461
(3)
0
0
0
750,000
0
0
Executive
Vice President/
2004
0
0
0
0
0
0
0
Chief
Operating Officer
2003
0
0
0
0
0
0
0
Larry
Goldman
2005
150,000
0
0
0
0
0
0
Chief
Financial Officer/
2004
65,993(4
)
0
0
90,000
750,000
0
0
VP
Finance
2003
0
0
0
0
0
0
0
Monica
Soares
2005
65,000
0
0
0
0
0
0
Senior
VP
2004
47,500
79,000
(6)
0
0
300,000
0
0
Administration
2003
66,000
(5)
0
0
0
0
0
0
_____________________________
(1) Patrick
Rogers became our Chairman, Chief Executive Officer and President on December5,2003. Prior to that, he was our President. Mr. Rogers is also the Chairman
of
the board of directors. The $200,000 bonus was accrued at December 31, 2005
and
will not be paid until the Board of Directors approve payment, which is at
the
time when they determine that the Company has sufficient financial
resources.
(2) This
amount consists of fees paid to a law firm and other entity affiliated with
Mr.
Pang for services provided by such firm and entity during fiscal years 2004
and
2003 and to allow the company to employ Mr. Pang. The $300,000 for “Restricted
Stock Awards” was accrued in 2005 and paid by the issuance of 750,000 shares of
stock on January 10, 2006. The amounts in the “All Other Compensation” relates
to the expenses paid by the company for Mr. Pang’s apartment in China. The
$150,000 bonus was accrued at December 31, 2005 and will not be paid until
the
Board of Directors approve payment, which is at the time when they determine
that the Company has sufficient financial resources.
29
(3) This
amount includes consulting fees paid to an entity affiliated with Mr. Galvin
for
services provided by such firm and entity during the fiscal year, 2005, upon
Mr.
Galvin becoming an employee of WinWin Gaming, Inc. in June 2005.
(4) This
amount consists of fees paid to an entity affiliated with Mr. Goldman for
services provided by him through such firm and entity during the fiscal year
2004.
(5) This
amount consists of fees paid to an entity affiliated with Ms. Soares for
services provided by her through such firm and entity during the fiscal year
2003.
(6) This
amount was accrued at December 31, 2004 and was paid in full in
2005.
OPTION
GRANTS IN LAST FISCAL YEAR
The
following table sets forth the grant of stock options made during the year
ended
December 31, 2005 to the persons named in the Summary Compensation
Table:
Name
Number
of Securities
Underlying
Options
Granted
%
of Total Options Granted to Employees in Fiscal
Period
Exercise
Price
per Share
Expiration
Date
Patrick
Rogers
1,000,000
15.13
%
$
0.40
12/19/10
Mark
Galvin
750,000
11.35
%
$
0.535
6/13/10
The
following table sets forth information with respect to exercised and unexercised
stock options held by the persons named in the Summary Compensation Table at
December 31, 2005.
AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR-END OPTION VALUES
Options
Exercised
In
2005
Number
of Unexercised
Options
at Fiscal Year-End
#
Value
of Unexercised
In-the-Money
Options
At
Fiscal Year-End ($)
Name
Number
Value
Exercisable
Unexercisable
Exercisable
Unexercisable
Patrick
Rogers
0
$
0
1,900,000
0
$
100,000
$
0
Monica
Soares
0
$
0
300,000
0
$
0
$
0
Peter
Pang
0
$
0
800,000
0
$
0
$
0
Mark
Galvin
0
$
0
0
750,000
$
0
$
0
Larry
Goldman
750,000
$
160,920
0
0
$
0
$
0
30
Compensation
of Directors
All
directors are reimbursed for out-of-pocket expenses in connection with
attendance at board of directors’ and/or committee meetings. Independent
directors receive a grant of 25,000 non-qualified stock options upon becoming
directors and then they also receive a grant of an additional 15,000
non-qualified stock options for each meeting of the board of directors that
they
attend. All directors received 15,000 options each for the board meeting they
attended in 2005.
Employment
Agreements
In
2005,
we have entered into formal five-year employment agreements with Patrick Rogers,
CEO, President & Chairman and Peter Pang, President of Win Win Consulting
(Shanghai) Co., Ltd., to be effective as of January 1, 2006. The agreements
have
provisions for automatic renewals for additional one-year periods. If either
contract is terminated without cause, generally we must pay the executive his
base salary for the remainder of the term of the contract.
Benefit
Plans
On
December 5, 2003, we adopted our 2003 Stock Plan, which permits the board,
as
the administrator of the plan, to grant incentive stock options, non-qualified
stock options and restricted stock to persons in a business relationship with
us. By written consent of the holders of a majority of the Company's outstanding
common stock, dated October 18, 2004, the 2003 Stock Plan was approved. Other
than our 2003 Stock Plan, we do not have any pension plan, profit sharing plan,
or similar plans for the benefit of our officers, directors or employees;
however we may establish such plans in the future. We have established a 401k
Savings Plan, through our Professional Employer Organization (PEO) called
Administaff.
Compliance
with Section 16(a) of the Securities Exchange Act
Section
16(a) of the Exchange Act required our executive officers and directors, and
person who beneficially own more than ten percent of our equity securities,
to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than ten percent
shareholders are required by SEC regulation to furnish us with copies of all
Section 16(a) forms they file. Based on our review of the copies of such forms
received by us, we believe that during the year ended December 31, 2005, all
such filing requirements applicable to its officers and directors were complied
with, except for the following:
The
following directors and officers each failed to timely file a Form 4, which
required the reporting of one stock transaction involving company’s issuance of
stock options received by each of them on December 31, 2005. Forms 5 were
subsequently filed disclosing the option grants.
Patrick
O. Rogers
Arthur
J.
Petrie
Dwight
V.
Call
Peter
Pang
John
Gronvall
31
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED
STOCKHOLDER MATTERS.
The
following table sets forth information relating to the beneficial ownership
of
our common stock by our executive officers and directors and by our directors
and executive officers as a group as of December 31, 2005.
Consists
of 8,500,000 shares beneficially owned by Mr. Rogers indirectly through
the Rogers Living Trust; 500,000 shares beneficially owned by Mr.
Rogers
indirectly through the China Sue Trust; 1,200,000 options (which
includes
300,000 options held by Monica Soares, Mr. Rogers’ wife) to purchase
common stock at an exercise price of $0.45, which vested as of December30, 2004; and 1,000,000 options to purchase common stock at an exercise
price of $.40, which vested as of December 19, 2005. Mr. Rogers disclaims
beneficial ownership of the shares held by his family members. Ms.
Soares
disclaims beneficial ownership of the shares held by Mr.
Rogers.
32
(2)
Consists
of 21,650 shares held by Mr. Pang indirectly through IPO Pang P.C.;
2,257,697 shares held by Mr. Pang indirectly through Landward
International, Ltd.; 800,000 options to purchase common stock at
an
exercise price of $0.45, which vested as of December 30, 2004; and
50,000
warrants held indirectly by Landward International, Ltd. to purchase
common stock at an exercise price of
$0.50
(3)
Consists
of 72,000 shares held by Mr. Call directly; 55,000 options to purchase
common stock at an exercise price of $0.50, which vested as of February12, 2004; 45,000 options to purchase common stock at an exercise
price of
$0.45, which vested as of December 30, 2004; 15,000 options to purchase
common stock at an exercise price of $1.05, which vested February18,2005; 300,000 options to purchase common stock at an exercise price
of
$0.40, which vested as of December 19, 2005; 50,000 options to purchase
common stock at an exercise price of $0.72, which vested as of December31, 2004, and are held by Christine Call (Mr. Call’s wife); and 100,000
warrants to purchase common stock at an exercise price of
$0.50.
(4)
Consists
of 4,709,678 shares held by Mr. Petrie directly; 156,000 shares held
indirectly through Players Club Partners, LLC; 67,000 shares held
by a
broker; 55,000 options to purchase common stock at an exercise price
of
$0.50, which vested as of February 12, 2004; 45,000 options to purchase
common stock at an exercise price of $0.45, which vested as of December30, 2004; 15,000 options to purchase common stock at an exercise
price of
$1.05, which vested as of February 18, 2005; and 923,228 warrants,
of
which 773,228 are held by Mr. Petrie to purchase common stock at
an
exercise price of $0.50; and 150,000 warrants to purchase common
stock at
an exercise price of $0.50 are held by Players Club Partners,
LLC.
(5)
Consists
of 3,879,850 shares held by Mr. Gronvall indirectly through the John
M.
Gronvall Revocable Trust; 156,000 shares held by Mr. Gronvall indirectly
through Players Club Partners, LLC; 7,750 shares held by a broker;
70,000
options to purchase common stock at an exercise price of $0.45, which
vested as of December 30, 2004; 15,000 options to purchase common
stock at
an exercise price of $1.05, which vested as of February 12, 2005;.and
275,000 warrants to purchase common stock at an exercise price of
$0.50,
of which 125,000 are held indirectly through the John M. Gronvall
Revocable Trust and 150,000 are held indirectly through Players Club
Partners, LLC.
(6)
Consists
of 75,000 shares held by Mr. Galvin directly; 75,000 shares held
indirectly through Camelot Consulting Services, LLC; and 10,000 warrants
to purchase common stock at an exercise price of
$0.50.
(7)
Consists
of 357,558 shares held directly by Mr. Goldman, and 100,000 shares
held
indirectly through TIAA-CAREL, LLC.
(8)
Consists
of the 11,200,000 shares held directly or indirectly by Ms. Soares’
husband, Patrick Rogers. See Note (1) above.
33
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During
the 2005, 2004, and 2003 fiscal years, we were provided services from a law
firm
affiliated with Peter Pang, our director, President of Win Win Consulting
(Shanghai) Co., Ltd. and General Counsel. We paid such firm fees in the
aggregate amount of $12,100 in 2005, $31,738 in 2004 and $60,618 in
2003.
Form
of Warrant issued in connection with settlement agreement is incorporated
by reference to Exhibit 4 to the 10-QSB quarterly report of the Company
for the quarter ended September 30, 2003.
Cooperation
Agreement, dated December 15, 2003, between Win Win Consulting (Shanghai)
Co. Ltd. and Shanghai Welfare Lottery Issuing Center is incorporated
by
reference to Exhibit 10.1 to the Form 8-K current report of the Company
filed on January 2, 2004.
Form
of Subscription Agreement used for private placements is incorporated
by
reference to Exhibit 10.28 to the Annual report on Form 10-KSB of
the
Company for the fiscal year ended December 31, 2003.
Project
Cooperation Agreement, dated April 30, 2004, between Win Win Consulting
(Shanghai) Co. Ltd and Shanghai VSAT Network Systems Co. Ltd. is
incorporated by reference to the Company’s Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2004.
Joint
Venture Agreement, dated as of September 30, 2005, by and between
Solidus
Networks, Inc., d/b/a PayByTouch Solutions and WinWin Gaming, Inc.
is
incorporated by reference to Exhibit 10.1 to the Current report on
Form
8-K filed on October 20, 2005.
*10.20
Security
Agreement, dated as of September 30, 2005, by WinWin Gaming, Inc.,
in
favor of Solidus Networks, Inc., d/b/a PayByTouch Solutions is
incorporated by reference to Exhibit 10.2 to the Current report on
Form
8-K filed on October 20, 2005.
*10.21
Secured
Promissory Note, dated September 30, 2005, by WinWin Gaming, Inc.
to
Solidus Networks, Inc., d/b/a PayByTouch Solutions is incorporated
by
reference to Exhibit 10.3 to the Current report on Form 8-K filed
on
October 20, 2005.
*10.22
Acquisition
Agreement, dated September 27, 2005, by and among WinWin Gaming,
Inc.,
E-Bear Digital Software Co., Ltd. (“E-Bear”) and the Shareholders of
E-Bear is incorporated by reference to Exhibit 10.1 to the Current
report
on Form 8-K filed on December 27, 2005.
10.23
Employment
Agreement, dated December 20, 2005, between WinWin Gaming, Inc. and
Peter
Pang.
10.24
Employment
Agreement, dated December 20, 2005, between WinWin Gaming, Inc. and
Patrick Rogers.
10.25
Licensing
Agreement, dated December 15, 2005, between Pixiem, Inc. and Yamaha
Motor Company.
10.26
Licensing
Agreement, dated September 23, 2005 between Pixiem, Inc. and
C-Valley (Beijing) Information Technology Co., Ltd.
10.27
Distributorship
Agreement, dated June 20, 2005 between Pixiem, Inc. and Advanced
Mobile Solutions, Ltd.
36
10.28
Agreement,
dated August 3, 2005 between Pixiem, Inc. and Tira Wireless,
Inc.
10.29
Distributor
and Revenue Share Agreement, dated November 9, 2005 between Pixiem,
Inc.
and Tele-Mobile Company dba Telus Mobility.
10.30
License
Agreement, dated November 21, 2005 between Pixiem, Inc. and Paradox
Studios, Ltd.
10.31
License
Agreement, dated November 7, 2005, between Pixiem, Inc. and iScreen
Corporation.
10.32
Wireless
Pass Through Distribution Agreement, dated May 27, 2005 between Pixiem,
Inc and Wireless Developer, Inc. dba Wireless Developer
Agency.
10.33
Service
Agreement, dated July 8, 2005 between Pixiem, Inc. and Cellmania,
Inc.
10.34
Partnership
Agreement, dated September 1, 2005 between Pixiem, Inc. and 2ThumbZ
Entertainment.
10.35
License
Agreement, dated April 1, 2005, between Pixiem, Inc. and The All
England
Lawn Tennis Club (Wimbledon) Limited.
10.36
Settlement
and Release Agreement, dated March 30, 2006, between WinWin Gaming,
Inc.
and David Bernard.
*11.
Statement
re: computation of per share earnings reference is made to the
Consolidated Statements of Operations of the Consolidated Financial
Statements of the Company which are incorporated herein by
reference.
Rule
13a-14(a)/15d-14(a) Certifications by the Principal Executive
Officer
31.2
Rule
13a-14(a)/15d-14(a) Certifications by the Principal Financial
Officer
32
Section
1350 Certifications by the Principal Executive Officer and Principal
Financial Officer
________________________________________
* Incorporated
by reference as indicated
37
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit
Fees
The
aggregate fees billed for each of the fiscal years ended December 31, 2005
and
2004 for professional services rendered by the principal accountant for the
audit of our annual financial statements and review of the financial statements
included in our Form 10-QSB or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years were $67,303 and $48,235, respectively.
Audit-Related
Fees
The
aggregate fees billed in the fiscal year ended December 31, 2005 and 2004 for
assurance and related services by the principal accountant that are reasonably
related to the performance of the audit or review of the registrant’s financial
statements and are not reported under the paragraph captioned “Audit Fees” above
are $0 and $0, respectively.
Tax
Fees
The
aggregate fees billed in the fiscal years ended December 31, 2005 and 2004
for
professional services rendered by the principal accountant for tax compliance,
tax advice and tax planning were $2,500 and $0, respectively.
All
Other Fees
The
aggregate fees billed in the fiscal years ended December 31, 2005 and 2004
for
products and services provided by the principal accountant, other than the
services reported above under other captions of this Item 14 are $0 and $0,
respectively.
Pre-Approval
Policies and Procedures
On
March10, 2006, our board of directors adopted resolutions in accordance with the
Sarbanes-Oxley Act of 2002 requiring pre-approval of all auditing services
and
all audit related, tax or other services not prohibited under Section 10A(g)
of
the Securities Exchange Act of 1934, as amended to be performed for us by our
independent auditors, subject to the de minimus exception described in Section
10A(i)(1)(B) of the Exchange Act. These resolutions authorized our independent
auditor to perform audit services required in connection with the annual audit
relating to the fiscal year ended December 31, 2005 and the quarterly reviews
for the subsequent fiscal quarters of 2006 through the review for the quarter
ended September 30, 2006, at which time additional pre-approvals for any
additional services to be performed by our auditor would be sought from the
Board. Our board of directors also re-appointed and authorized Dwight V. Call
to
grant pre-approvals of other audit, audit-related, tax and other services
requiring board approval to be performed for us by our independent auditor,
provided that the designee, following any such pre-approvals, thereafter reports
the pre-approvals of such services at the next following regular meeting of
the
Board.
The
percentage of audit-related, tax and other services that were approved by the
board of directors is zero (-0-).
38
SIGNATURES
In
accordance with section 13 or 15(d) of the Securities Exchange Act of 1934,
the
Registrant caused this Report on Form 10-KSB to be signed on its behalf by
the
undersigned, thereto duly authorized individual.
In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-2
CONSOLIDATED
FINANCIAL STATEMENTS:
BALANCE
SHEET
F-3
STATEMENTS
OF OPERATIONS
F-4
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
F-5
STATEMENTS
OF CASH FLOWS
F-7
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-8
F-1
Board
of Directors
WinWin
Gaming, Inc.
Las
Vegas, Nevada
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
audited the accompanying consolidated balance sheet of WinWin Gaming, Inc.
and
Subsidiaries (a development stage company) (“Company”) as of December 31, 2005
and the related consolidated statements of operations, stockholders' equity
and
cash flows for each of the two years in the period then ended and for the period
from May 10, 2002 (inception) to December 31, 2005. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting, as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of WinWin Gaming, Inc. and
Subsidiaries (a development stage company) as of December 31, 2005 and the
results of their operations and their cash flows for each of the two years
in
the period then ended, and for the period from May 10, 2002 (inception) to
December 31, 2005 in conformity with accounting principles generally accepted
in
the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, at December 31, 2005, the Company has a
working capital deficit of approximately $2.3 million, including a note payable
in the amount of $1 million (subsequently increased to $2.5 million in 2006)
to
PayByTouch which is due on April 30, 2006, and has sustained cumulative net
losses of $21.5 million since its inception. These conditions, among others
more
fully described in Note 2 to the consolidated financial statements, raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regards to this matter are described in Note 2 to the
consolidated financial statements. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
WinWin
Gaming, Inc. (the “Company”), a Delaware corporation, formerly called Junum
Incorporated (“Junum”), which under previous management operated several
businesses under different corporate names, was incorporated on December 30,1992. Junum discontinued its operations in 2002. On December 31, 2002, the
Company amended its certificate of incorporation to change its name from Junum
to WinWin Gaming, Inc.
When
used
in this report, the terms "Company", "we", "our" and "us" refer to WinWin
Gaming, Inc. and its consolidated subsidiaries. We consider all of our
operations to be in the development stage.
Win
Win Acquisition Corp.
Win
Win
Acquisition Corp. (“Acquisition Corp.”), a Nevada corporation, was incorporated
on December 31, 2002. Pursuant to a stock exchange agreement, Acquisition Corp.
became a wholly-owned subsidiary of the Company by exchanging 100% of its
outstanding common stock for shares of the Company’s common stock. Acquisition
Corp was formed solely for the purpose of effecting the acquisition of 100%
of
Win Win, Inc.
Win
Win, Inc.
Win
Win,
Inc., a Nevada corporation, (“Win Win, Inc.”) was incorporated May 10, 2002. Win
Win, Inc.’s business is to derive consulting revenue by designing instant
scratch off lottery tickets as well as offering marketing services to help
increase lottery ticket sales for the instant scratch off ticket market in
the
Peoples Republic of China (“PRC”).
Win
Win Consulting (Shanghai) Co. Ltd.
Win
Win
Consulting (Shanghai) Co. Ltd. (“Win Win Shanghai”), a corporation organized in
the PRC on November 28, 2003, is a wholly-owned foreign subsidiary conducting
all of the business in the PRC.
1. ORGANIZATION
AND NATURE OF OPERATIONS (Continued)
Win
Win Wireless, LLC
Win
Win
Wireless, LLC, (“Wireless”), a Delaware limited liability company and a
wholly-owned subsidiary was formed on May 2, 2005 to serve as a holding company
for all of the Company's wireless solutions and wireless game content
subsidiaries.
Pixiem,
Inc.
Pixiem,
Inc. a New Jersey corporation which was acquired by the Company on May 11,2005,
was incorporated on January 7, 2004 and is a wholly-owned subsidiary of
Wireless. Pixiem is in the business of designing, developing, and publishing
wireless mobile games for deployment on mobile phones in conjunction with mobile
phone carriers. Pixiem works with mobile phone carriers to distribute its
wireless games and applications.
Pixiem,
Inc. - South Korean Subsidiary of Pixiem, Inc.
On
April1, 2005, Pixiem, Inc. formed a South Korean subsidiary, (“Pixiem Korea”), to
develop all of its game software.
Win
Win Holding, Limited
Win
Win
Holding Limited was incorporated in Hong Kong on September 17, 2005 for the
initial purpose of acquiring Shanghai E-BEAR Digital Mobile Software Inc.,
an
early-stage mobile game development studio located in Shanghai.
Shanghai
E-BEAR Digital Mobile Software, Inc.
Shanghai
E-BEAR Digital Mobile Software Inc.,
(“E-BEAR”) a PRC Corporation, was acquired in September 2005. E-BEAR is an
early-stage mobile game development studio located in Shanghai. E-BEAR has
developed and produced approximately 60 mobile games in China and currently
generates limited revenue from 24 of these titles in the PRC.
1. ORGANIZATION
AND NATURE OF OPERATIONS (Continued)
Control
by Principal Stockholders
The
directors, executive officers and their affiliates or related parties, own
beneficially and in the aggregate, a significant percentage of the voting power
of the outstanding shares of the common stock of the Company. Accordingly,
the
directors, executive officers and their affiliates, if they voted their shares
uniformly with others, would have the ability to control the approval of most
corporate actions, including increasing the authorized capital stock of the
Company and the dissolution, merger or sale of the Company’s stock, assets or
business.
2. CAPITAL
RESOURCES AND GOING CONCERN
At
December 31, 2005, we have a working capital deficit of approximately $2.3
million, including a note payable in the amount of $1 million (subsequently
increased to $2.5 million in 2006) to PayByTouch which is due on April 30,2006
(see Notes 4 and 9), and we have sustained cumulative net losses of $21.5
million since our inception. Our current operating expenses aggregate
approximately $850,000 per month ($250,000 for our Corporate office; $150,000
for our operations in China; and $450,000 for our Pixiem operations). Also,
we
are a development stage company with minimal revenue earned to date. These
factors raise substantial doubt about our ability to continue as a going
concern.
Our
operations to date have been primarily financed by debt and equity investments.
There can be no assurance that any additional financing will be available or,
if
it is available, that it would be on acceptable terms.
We
are
currently seeking new investments to fund our operations. Also, we are seeking
opportunities for business combination transactions which are complementary
to
our businesses, and may result in revenue growth and positive operating results.
Our continued operations are highly dependent upon our identification of
investment or business combination transactions, and the successful completion
of such transactions.
As
of
April 14, 2006, we had cash of approximately $50,000. As of such date, we
had
total current liabilities that significantly exceed our total available cash.
Further, the majority of our April payroll will be due by April 28, 2006.
Unless
we are able to obtain financing, we will not be able to pay our current
liabilities, and we will not be able to satisfy our current payroll obligations.
Accordingly, we will likely be forced to reduce our workforce and maintain
only
minimal operations until we are able to obtain financing. Our lack of cash
may
have a direct negative impact on our operations and the results thereof.
As
of
April 14, 2006, we are negotiating with an investment group to obtain funding
of
up to $2 million. We are also negotiating with an investment banking firm
to
obtain assistance in raising additional capital. There can be no assurance
that
we will be successful in completing any of these transactions or obtaining
such
additional capital and we have no binding commitments to obtain any
capital.
Principles
of Consolidation and Basis of Presentation
Our
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated.
The
net
loss from foreign operations in China and South Korea for the year ended
December 31, 2005 was approximately $2,095,000, and in China for the year ended
December 31, 2004 was $837,337 (no Korean operations in 2004). Total combined
assets and net assets (deficit) in Win Win Shanghai and Pixiem Korea at December31, 2005 were $1,455,024 and $(228,674), respectively, and in China for the
year
ended December 31. 2004 was $114,212 and $93,151, respectively. The Company’s
total investment in foreign operations in Win Win Holding, Limited, Win Win
Shanghai and Pixiem Korea at December 31, 2005 was $3,194,963 and in Win Win
Shanghai in 2004 was $940,000.
Restrictions
on Transfer of Assets out of China
Dividend
payments by Win Win Shanghai are limited by certain statutory regulations in
China. In China, no dividends may be paid without first receiving prior approval
from the Foreign Currency Exchange Management Bureau. Dividend payments are
restricted to 85% of profits, after tax in China. Repayments of loans or
advances from Win Win Shanghai, unless certain conditions are met, will be
restricted by the Chinese government. Cash held in the PRC by Win Win Shanghai
at December 31, 2005 was $81,966, and is not freely transferable to the United
States without permission from the Foreign Currency Exchange Management Bureau
of the PRC. The effect of these restrictions on the consolidated financial
position and operating results of the Company could not be reasonably
determined, but was deemed by management not to be significant at December31,2005.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign
Currency Translation
The
functional currency for Win Win Shanghai is the Yuan Renminbi. The functional
currency for Pixiem Korea is the Korean Won. In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation,”
assets and liabilities of the Company's foreign operations are translated into
U.S. dollars at the exchange rates in effect at the balance sheet date; revenues
and expenses are translated using the average exchange rates in effect during
the period. The cumulative translation adjustments are included in accumulated
other comprehensive income (loss), which is a separate component of
stockholders' equity. Foreign currency transaction gains or losses are included
in the results of operations. Due to the stability of the Chinese Yuan and
the
Korean Won in 2005, and for the cumulative period from May 10, 2002 to December31, 2005, there were no significant translation adjustments during that period
of time.
Comprehensive
Income (Loss)
Under
SFAS No. 130, “Reporting Comprehensive Income,” we are required to report the
changes in stockholders' equity from all sources during the period, including
accumulated foreign currency translation adjustments. Foreign exchange
translation gains were not significant for the years ended 2005 and 2004, and
for the cumulative period from May 10, 2002 to December 31, 2005.
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 the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Significant
Estimates
Several
areas require management's estimates relating to uncertainties for which it
is
reasonably possible that there will be a material change in the near term.
The
more significant areas requiring the use of management estimates are related
to
accrued expenses, the valuation of intangible assets, the valuation of
contingent liabilities, and the valuation of the stock warrants, and options
issued and outstanding.
Extinguishment
of Debt of Preacquisition Liabilities From Junum - Extraordinary Income - Year
Ended December 31, 2004
Prior
to
2004, several areas required management's estimates relating to uncertainties
for which it is reasonably possible that there will be a material change in
the
near term. The more significant areas requiring the use of management estimates
related to valuation of the Company’s liabilities that were deemed acquired by
Win Win, Inc. in the reverse acquisition, valuation of payroll tax and other
contingent liabilities including taxes payable, and the valuation of the stock
warrants and options issued by Junum and outstanding.
The
Company retained all of the liabilities that it had prior to the reverse
acquisition with Win Win, Inc., when the Company operated under the name Junum,
including those liabilities that it incurred in connection with a series of
separate businesses that it operated under different management groups since
inception in December 31, 1992 (collectively, these liabilities relating to
the
prior operations of the Company are referred to as the “Junum Liabilities”). In
accordance with SFAS No. 141, “Accounting for Business Combinations”, if a
preacquisition contingency can be determined, that preacquisition contingency
is
required to be accrued. Management had estimated its exposure to the Junum
Liabilities at December 31, 2003. Most of these liabilities had been resolved
during the years ended December 31, 2005 and 2004 and the remaining liabilities
at December 31, 2005 are recorded under the caption “Accrued legal liabilities”
at their estimated settlement amount. The extraordinary income recognized during
the year ended December 31, 2004 from the extinguishment of Junum Liabilities
was $598,229. The Junum liabilities totaled approximately $210,000 at December31, 2005, which has been recorded as a contingent liability for a legal
settlement (refer to Note 11).
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
Recognition
We
recognize revenues in accordance with the guidelines of the Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 01-04,
“Revenue Recognition”. For our lottery operations, we recognize our consulting
revenues, which are derived principally from the sale of lottery tickets, when
we receive final lottery sales data from the China Government Welfare Lottery
Bureaus. For our wireless operations, we recognize revenues principally from
the
sale or subscription of our games to wireless subscribers. The wireless carriers
and their agents are responsible for billing, collecting, and remitting to
us
our fees. The wireless carriers generally report the final sales data to us
within 10 to 45 days following the end of each month. When final sales data
is
not available in a timely manner for reporting purposes, we estimate our
revenues based on available sales data and historical trends. To date, instances
requiring estimates have not been significant. We will record differences
between estimated revenues and actual revenues in the next reporting period
once
the actual amounts are determined.
Software
Development Costs
We
account for our software development costs in accordance with SFAS No. 86,
“Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed.” Under SFAS No. 86, we expense software development costs as incurred
until we determine that the software is technologically feasible. Generally,
to
establish whether the software is technologically feasible, we require the
product to be successfully deployed (ported) onto a handset. We assess its
detailed program designs to verify that the working model of the game engine
has
been tested against the product design.
Research
and development costs associated with the creation of computer software (game
platforms) graphics and porting costs, prior to reaching technological
feasibility are expensed as incurred, except for related computer equipment
expenditures for personal computers and other hardware components, which are
capitalized and depreciated over their useful lives.
Generally,
all expenditures for research activities relating to mobile game development
and
improvement are charged to expense as incurred. Such expenditures amounted
to
$818,975 in 2005.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash
and Cash Equivalents
We
consider all highly-liquid debt investments with a maturity of three months
or
less as cash equivalents.
Equipment
Expenditures
for maintenance, repairs and betterments, which do not materially extend the
normal useful life of an asset, are charged to operations as incurred. Upon
sale
or other disposition of assets, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in
income.
Depreciation
and amortization are provided for financial reporting on the accelerated and
the
straight-line methods over the estimated useful lives of the respective assets
as follows:
Estimated
Useful Lives
Equipment
5 - 7
years
Software
3 years
Leasehold
improvements
10
years
Long-Lived
Assets
Long-lived
assets, other than goodwill, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets might
not be recoverable. Conditions that would necessitate an impairment assessment
include a significant decline in the observable market value of an asset, a
significant change in the extent or manner in which an asset is used, or any
other significant adverse change that would indicate that the carrying amount
of
an asset or group of assets is not recoverable.
For
long-lived assets used in operations, impairment losses are only recorded if
the
asset’s carrying amount is not recoverable through its undiscounted,
probability-weighted cash flows. We measure the impairment loss based on the
difference between the carrying amount and estimated fair value.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Lived
Assets (Continued)
Long-lived
assets are considered held for sale when certain criteria are met, including:
management’s commitment to a plan to sell the asset, the asset is available for
sale in its immediate condition, and the sale is probable within one year of
the
reporting date. Assets held for sale are reported at the lower of cost or fair
value less costs to sell.
Goodwill
We
evaluate goodwill, at a minimum, on an annual basis and whenever events and
changes in circumstances suggest that the carrying amount may not be
recoverable. Impairment of goodwill is tested at the reporting unit level by
comparing the reporting unit’s carrying amount, including goodwill, to the fair
value of the reporting unit. The fair values of the reporting units are
estimated using discounted projected cash flows. If the carrying amount of
the
reporting unit exceeds its fair value, goodwill is considered impaired and
a
second step is performed to measure the amount of impairment loss, if any.
We
conduct our annual impairment test as of December 31 of each year, and have
determined there to be no impairment in 2005. There were no events or
circumstances from the date of our assessment through the filing date of this
report, that would impact this assessment.
Start-Up
Costs
In
accordance with the provisions of the American Institute of Certified Public
Accountants' Statement of Position (“SOP”) 98-5, "Reporting on the Costs of
Start-up Activities,” we expense all start-up and organizational costs as they
are incurred. Preproduction design and development costs for the current
television program being produced in the PRC are expensed as incurred. This
program is being developed to help market our new Slam Dunk II
game.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equity-Based
Compensation
We
account for employee stock options in accordance with Accounting Principles
Board Opinion No. 25 (“APB”), "Accounting for Stock Issued to Employees." Under
APB No. 25, the Company recognizes stock-based compensation expense related
to
employee stock options, only for options that are granted at a price below
the
market price on the day of grant. SFAS No. 123, "Accounting for Stock-Based
Compensation," prescribes the recognition of compensation expense based on
the
fair value of options on the grant date, but allows companies to continue
applying APB No. 25 if certain pro forma disclosures are made assuming
hypothetical fair value method application. Stock-based compensation expense
is
recognized for non-qualified stock options over the period the option
vests.
In
December, 2004, the Financial Accounting Standards Board reached a consensus
on
the effective date for SFAS No. 123R,“Share-Based
Payments,”
for
fiscal years beginning after June 15, 2005. SFAS No. 123R requires us to measure
compensation cost for all outstanding unvested share-based awards at fair value.
We will adopt the provisions of SFAS No. 123R with an implementation date of
January 1, 2006. The adoption of this standard will not affect the stock-based
compensation associated with our restricted stock awards which are already
recorded at fair value on the date of grant and recognized over the service
period.
SFAS
No.
123R permits public companies to adopt its requirements using one of two
methods: “the modified prospective” method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements
of
SFAS No. 123R for all share-based payments granted after the effective date
and
(b) based on the requirements of SFAS No. 123R for all awards granted to
employees prior to the effective date of SFAS No. 123R that remain unvested
on
the effective date; or the “modified retrospective” method which includes the
requirements of the modified prospective method described above, but also
permits companies to restate either all prior periods presented or all prior
interim periods of the year of adoption based on the amount previously
recognized under SFAS No. 123 for purposes of pro forma disclosures. We plan
to
adopt SFAS No, 123R using the modified prospective method.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Retirement
Savings Plan
We
have a
401(k) savings plan covering substantially all of our U.S. employees. Eligible
employees may contribute through payroll deductions. There were no Company
contributions made to the 401(k) savings plan in 2005 and 2004.
Income
Taxes
Income
taxes are accounted for under the asset and liability method in accordance
with
SFAS No. 109 "Accounting for Income Taxes." Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
Deferred
tax assets are reduced by a valuation allowance to the extent that the
recoverability of the asset is unlikely to be recognized.
We
did
not provide any current or deferred income tax provision or benefit for any
periods presented to date because the Company has continued to experience a
net
operating loss since inception (refer to Note 8).
Fair
Value of Financial Instruments
The
recorded amounts of our financial assets and liabilities (cash, accounts
receivable, accounts payable, accrued expenses and notes payable) at December31, 2005 approximate the fair value based on the Company's incremental borrowing
rate or due to the relatively short period of time between origination of the
instruments and their expected realization. The fair value of our warrant
liability, accounted for under the guidance provided in Emerging Issues Task
Force Abstract (“EITF”) 00-19, “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock,” has been
estimated using the Black-Scholes model (see Note 10).
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration
of Credit Risk
Cash
in
bank accounts is at risk to the extent that it exceeds Federal Deposit Insurance
Corporation insured amounts. To minimize risk, the we place our cash with high
credit quality institutions. A substantial portion of our cash is deposited
in
accounts with two prominent U.S. banks. Additionally, we maintain approximately
$82,000 and $59,000 in cash accounts in the PRC and Hong Kong,
respectively..
Loss
Per Share
The
Company accounts for loss per share under the provisions of SFAS No. 128,
“Earnings Per Share,” which requires a dual presentation of basic and diluted
loss per share. Basic loss per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the year. Diluted earnings per share is
computed assuming the conversion of convertible preferred stock and the exercise
or conversion of common stock equivalent shares, if dilutive, consisting of
unissued shares under options and warrants.
Segment
Reporting
We
follow
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information.” We currently operate and report two business segments - our
wireless business from Pixiem and E-BEAR and our lottery business from Win
Win
Shanghai.
For
the
year ended December 31, 2005, we had two reportable segments consisting of
mobile games, reflecting the sale and distribution of mobile games by Pixiem
(May 11, 2005 to December 31, 2005) and lottery activities in the PRC. We
presently evaluate performance based on revenue, and operating profit (loss)
before income taxes. The following is information for our reportable segments
for the year ended December 31, 2005:
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29”.SFAS
No.
153 is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005, with earlier application permitted. The adoption
of SFAS No. 153 is not expected to have a material impact on our results of
operations or financial position.
In
March
2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for
Conditional Asset Retirement Obligations.” FIN 47 is an interpretation of
SFAS
No.
143, “Asset Retirement Obligations,” which was issued in June 2001. FIN 47 was
issued to address diverse accounting practices that have developed with regard
to the timing of liability recognition for legal obligations associated with
the
retirement of a tangible long-lived asset in which the timing and/or method
of
settlement are conditional on a future event that may or may not be within
the
control of the entity. According to FIN 47, uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. FIN
47
is effective no later than December 31, 2005 for our Company. We are currently
evaluating the impact of the adoption of FIN 47 on our financial
statements.
In
May
2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
“Accounting Changes and Error Corrections” (SFAS No. 154) which replaces APB No.
20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in
Interim Financial Statements - an Amendment of APB Opinion No. 28”. SFAS No. 154
provides guidance on the methods issuers should use to account for and reporting
accounting changes and error corrections. Specifically, this statement requires
that issuers retrospectively apply any voluntary change in accounting principles
to prior period financial statements, if it is practicable to do so. This
principle replaces APB No. 20, which required that most voluntary changes in
accounting principle be recognized by including the cumulative effect of the
change to the new accounting principle on prior periods in the net income
reported by the issuer in the period in which it instituted the change. SFAS
No.
154 also redefines the term “restatement” to mean the correction of an error by
revising previously issued financial statements. Unless adopted early, SFAS
No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The company does not expect the
adoption of SFAS No. 154 to have an impact on its financial position or result
of operations.
4. BUSINESS
ACQUISITIONS AND JOINT VENTURE AGREEMENT
Acquisition
of Pixiem, Inc.
On
May11, 2005, we (through Wireless) acquired all of the outstanding capital stock
of
Pixiem in exchange for an aggregate of 3,000,000 shares of the Company's common
stock pursuant to agreements entered into in March 2005. These shares were
valued at $1.8 million, representing their fair market value based upon the
closing sale price per share of our common stock for the trading day immediately
preceding the closing date of the acquisition. At that date, Pixiem was indebted
to the Company in the amount of $557,984 as a result of loans and accrued
interest made pursuant to a loan agreement entered into contemporaneously with
the execution of the Pixiem acquisition agreement. Such outstanding loan amount
has been accounted for as a portion of the Pixiem purchase price.
We
incurred direct costs of approximately $50,000 related to the Pixiem
acquisition.
The
acquisition of Pixiem gave us immediate access to mobile games and content
development capability for the pursuit of growth opportunities in the wireless
entertainment game market worldwide. Pixiem also represents for us a step toward
the development, sales and distribution of a broad line of wireless games for
a
number of regional markets and potentially worldwide markets.
The
total
purchase price for Pixiem, which consisted of the value of the stock
($1,800,000); and assumption of our pre-acquisition debt to Pixiem, net of
cash
acquired ($541,357); totaled $2,341,357. The total purchase price, including
the
$50,000 of indirect costs capitalized which related to the Pixiem acquisition,
was $2,391,357.
In
accordance with the purchase method of accounting, the results of Pixiem and
the
estimated fair market values of the assets and liabilities have been included
in
our consolidated financial statements from the date of acquisition (May 11,2005).
4. BUSINESS
ACQUISITIONS AND JOINT VENTURE AGREEMENT (Continued)
Acquisition
of Pixiem, Inc. (continued)
The
purchase price for Pixiem was allocated to assets acquired and liabilities
assumed. The estimated fair value of the tangible assets acquired and
liabilities assumed approximated the historical cost basis. The excess of the
purchase price over the fair value of the tangible assets was allocated to
in-process research and development and intangibles, based on their estimated
fair values, as determined by management with the assistance of an independent
third-party appraiser, as follows:
Accounts
receivable
$
144,877
Loan
receivable and investment in subsidiary
207,900
Other
assets
10,842
Property,
plant, and equipment
13,551
Customer
relationships
820,000
Goodwill
745,643
Total
assets acquired
$
1,942,813
Accounts
payable
(154,896
)
Other
current liabilities
(14,560
)
Total
liabilities assumed
(169,450
)
Net
assets acquired
$
1,773,357
Acquired
in-process research and development
618,000
Total
Purchase Price - Pixiem, Inc.
$
2,391,357
Of
the
$1,942,813 of acquired assets, $820,000 was assigned to customer relationships
and $745,643 was assigned to goodwill, which is not subject to amortization.
$618,000 was assigned to in-process research and development assets that were
written off at the date of acquisition in accordance with SFAS No. 2,
“Accounting for Research and Development Costs,” and FIN No. 4, “Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method.”. The allocation of the purchase price is based on the final valuation
of certain intangible assets that were obtained from the independent third-party
appraiser.
4. BUSINESS
ACQUISITIONS AND JOINT VENTURE AGREEMENT (Continued)
Acquired
“in-process research and development” expense in the 2005 Statement of
Operations represents the value assigned to research and development projects
in
our purchase of Pixiem. The projects were commenced ,but had not yet reached
technological feasibility at the date of acquisition, nor did they have any
alternative future use in research and development activities or other
applications. In accordance with SFAS No. 2, as interpreted by FIN 4, amounts
assigned to acquired in-process research and development meeting the above
criteria must be charged to expense at the date of consummation of the purchase
business combination. In 2005, a charge of $618,000 was recorded for purchased
in-process research and development costs in conjunction with this business
combination, based on the final allocations of purchase price.
Goodwill
is comprised of the residual amount of the purchase price over the fair value
of
acquired tangible and intangible assets. We believe that the goodwill value
in
Pixiem is not impaired principally due to the customer relationships, in
combination with the existing technology, are more valuable together than
separately. Pixiem has developed a good reputation beyond its existing customers
and the “work-force-in-place” value for having Pixiem's employees being
identified and hired. We have also done a recent valuation of Pixiem, Inc.
and
the results of the valuation showed a valuation in excess of the goodwill
recorded at acquisition.
The
operating results of Pixiem have been included in our statement of operations
from May 11, 2005. The following table presents the unaudited results of
operations of the Company as if the acquisition had been consummated as of
January 1, 2004, and includes certain pro forma adjustments, including
depreciation and amortization on the assets acquired, and research and
development costs.
4. BUSINESS
ACQUISITIONS AND JOINT VENTURE AGREEMENT (Continued)
Bijou
Studios, Inc. Asset Purchase
On
July5, 2005, the Company entered into an asset purchase agreement with Bijou
Studios, Inc., (“Bijou”) pursuant to which Bijou agreed to sell to the Company
all of its rights to software (called ClanPass Tournament System) described
below, for an aggregate purchase price of $400,000, of which $185,000 is payable
in shares of Company common stock. The purchase price was payable in
installments as follows: (i) $10,000 in cash was paid upon execution of the
acquisition agreement, (ii) $15,000 in cash was paid prior to the closing date
October 13, 2005, (iii) $35,000 in cash was paid subsequent to the closing
date,
(iv) $40,000 in cash was due on closing (unpaid), (v) $65,000 in cash was
payable 30 days following the closing date (unpaid), (vi) $50,000 in cash was
payable 60 days following the closing (unpaid), and (vii) $185,000 in restricted
stock was issued on the closing date October 13, 2005. Several months after
the
closing, a third party had also claimed an interest in the rights to the
ClanPass Tournament System (see Note 11). Until this potential litigation matter
is settled with this third party, we will not make any further payments as
specified in the asset purchase agreement with Bijou until this matter is
resolved. At the time of acquisition, we were unaware of any third party claims
to this software.
The
value
of the stock portion of the purchase price was determined by reference to the
market price of Company common stock on the last trading date prior to the
execution of the agreement (i.e., July 1, 2005). On such date, Company common
stock closed at $0.78; therefore, the Company was obligated, and we issued
237,179 shares of Company's restricted common stock to Bijou.
The
assets being acquired by the Company consist of rights to game software
applications known as the ClanPass Tournament System. The ClanPass Tournament
System consists of a suite of virtual servers that enable full interaction
between players, including chat, messaging, instant challenges, the creation
of
game server networks, and the designing of tournament templates. ClanPass also
provides the ability to integrate third-party game servers to create and manage
tournament-related transactions such as statistics, ranking, full player
reports, year-to-date summaries, prize-enabling, and similar functions. ClanPass
had not been placed in service at December 31, 2005.
4. BUSINESS
ACQUISITIONS AND JOINT VENTURE AGREEMENT (Continued)
Shanghai
E-BEAR Digital Mobile Software, Inc.
On
September 27, 2005, Win Win Holding Limited entered into an asset purchase
agreement (the “Agreement”) with E-BEAR Digital Software Co., Ltd. (“E-BEAR”), a
Chinese corporation, pursuant to which the Seller sold to the Company all of
the
Seller’s capital stock in exchange for cash and shares of the Company for an
aggregate purchase price of $300,000 of which $150,000 is payable in common
stock of the Company. This acquisition was subject to the approval of the
Chinese Government and on December 22, 2005 (“closing”), the Company received
from the Chinese Government a certificate of approval, allowing this acquisition
to be completed. The purchase price was payable in installments as follows:
(i)
$45,000 in cash was payable 30 days following the closing, (ii) $42,000 in
cash
was payable 90 days following the closing, and (iii) $21,000 in cash is payable
180 days of the closing. The remaining balance of $42,000 is to be paid upon
the
Seller reaching certain revenue milestones. The total amount paid in stock
as of
December 31, 2005 was $150,000. The company currently intends to pay off the
remaining cash balance to the former owners of E-BEAR of $150,000 in 2006 and
is
included under the caption “Notes Payable” on the balance sheet at December 31,2005.
The
value
of the stock portion of the purchase price was determined by reference to the
market price of the Company’s Common Stock on June 30, 2005. On such date, the
Company’s Common Stock closed at $0.80, therefore, the Company is obligated to
issue to 188,297 shares of its Common Stock to the Seller on the date of the
approval. The Assets acquired by the Company consist of mobile games (software).
It was determined that the company did not have any intangible assets at the
time of acquisition other than Goodwill. The total Goodwill recorded at the
date
of acquisition was $244,174. We believe that there is goodwill value in E-BEAR
because the company is in the growing China wireless entertainment game market,
and is therefore not impaired at December 31, 2005.
E-BEAR
is
an early-stage mobile game development company and its revenues and expenses
were not significant from January 1, 2005 to September 27, 2005. We had
determined that the book value of E-BEAR’s tangible assets approximated the fair
value of its tangible assets at September 27, 2005.
4. BUSINESS
ACQUISITIONS AND JOINT VENTURE AGREEMENT (Continued)
PayByTouch
Joint Venture and Note Payable
On
September 30, 2005, we entered into a Joint Venture Agreement (the "Joint
Venture Agreement") with Solidus Networks, Inc., d/b/a PayByTouch Solutions
("PBT") pursuant to which PBT loaned us one million dollars ($1,000,000) (the
"Loan"). The Loan was secured by a pledge to PBT of a security interest in
all
of our assets (the “Security Agreement”), as well as a Promissory Note in favor
of PBT evidencing the Loan (the "Note"). We were obligated under the Joint
Venture Agreement to repay the Loan in full on October 14, 2005, at an interest
rate of fifteen percent (15%) on all outstanding principal and at a rate of
seventeen percent (17%) after default.
On
January 17, 2006, the Company executed and delivered an Amended and Restated
Secured Promissory Note (the “Amended and Restated Note”) to PBT which amends,
restates and supersedes the Note. The Amended and Restated Note (a) increases
the principal amount to two and one-half million dollars ($2,500,000) (the
“New
Principal”), payable in full on March 31, 2006 (extended to April 30, 2006)(see
Notes 1 and 9) and (b) changes the annual interest rate on all outstanding
principal as of January 17, 2006, to eight percent (8%), and ten
percent (10%) after default, if there is an event of default as
defined.
However, the Company remains obligated to pay an annual interest rate of fifteen
percent (15%) on one
million dollars ($1,000,000) of the New Principal, for the period from September30, 2005 through, but not including, January 17, 2006.
In
addition, for a period of at least ninety (90) days, ending December 31, 2006
(the "Cooperation Term"), we will provide PBT with: (a) reasonable selling
support to assist in driving PBT's biometric authentication and payment
solutions into the Chinese Video Lottery Terminal (“VLT”) solution that is being
prepared by local Chinese parties and potentially by us in the future for
rollout across China; (b) potential networking contacts in China for the purpose
of promoting PBT solutions into other applications beyond VLTs; (c) support
from
our legal counsel for tactical and strategic guidance on PBT's entry of its
biometric technology into China; and (d) physical and logistical support for
PBT's entry into China.
Basic
loss per common share ("LPS") is calculated by dividing net loss by the weighted
average number of common shares outstanding during the year. Diluted earnings
per common share are calculated by adjusting the weighted average outstanding
shares, assuming conversion of all potentially dilutive stock options. No
diluted loss per share amounts are disclosed separately because their effect
is
antidilutive, due to the loss reported by the Company.
Common
stock equivalents warrants, totaling 9,476,721 and 7,091,181 at December 31,2005 and 2004, respectively, are not included in the diluted loss per share
for
the years ended December 31, 2005 and 2004, as they are anti-dilutive. The
warrants are generally exercisable 3-5 years from the issuance date at exercise
prices ranging from $.25 to $1.03 per share. Substantially all of the
outstanding warrants expire in 2008.
Depreciation
and amortization expense for the years ended December 31, 2005 and 2004 and
for
the cumulative period from May 10, 2002 (Inception) to December 31, 2005 were
$143,398, $37,438, and $312,364, respectively. The total net book value of
equipment and leasehold improvements in Korea and the PRC was $562,833 at
December 31, 2005.
The
portion of the acquisition costs of Pixiem and E-BEAR that has been allocated
to
customer relationships and goodwill totaled $1,809,818. Such allocation was
made
on the basis of their appraised value. The following table summarizes the lives
and carrying values of the Company's intangible assets by category, at December31, 2005:
Life
Gross
Amount
Accumulated
Amortization
Net
Carrying
Amount
Customer
relationships
3
$
820,000
$
170,835
$
649,165
Trademarks
10
38,523
-
38,523
Goodwill
989,818
-
989,818
Total
$
1,848,341
$
170,835
$
1,677,506
Trademarks
will be amortized when placed in service. Amortization expense for intangible
assets was $170,835 for the year ended December 31, 2005.
8. INCOME
TAXES
The
Company accounts for income taxes in accordance with the provisions of SFAS
No.
109, "Accounting for Income Taxes".
As
of
December 31, 2005, we have an available federal net operating loss carryforward
to offset future taxable income, if any, of approximately $16,000,000. The
federal net operating loss carryforwards expire during the years 2023 through
2025. The utilization of the our net operating loss will be subject to a
substantial limitation due to the “Change of ownership provisions” under Section
382 of the Internal Revenue Code and similar state provisions. Such limitation
may result in the expiration of all of the net operating loss before its
utilization. We also have a net operating loss carryforward for PRC income
tax
reporting purposes of approximately $2,000,000. Pixiem Korea has a net operating
loss carryforward for Korean income tax reporting purposes of approximately
$600,000.
The
Company has recorded a full valuation allowance of $6,510,000 against the
deferred tax asset, the federal net operating loss carryforward of $18,600,000,
as management believes that it is very likely that substantially all of the
deferred tax assets will not be realized. The change in the valuation allowance,
based on a 35% effective tax rate, in 2005 and 2004 was an increase of
approximately $3,200,540 and $2,460,172, respectively.
Prior
to
March 31, 2003, the date of the reverse merger and subsequent to that date,
the
Company filed consolidated tax returns with its subsidiaries and has continued
to file consolidated tax returns to date. However, we recently discovered that
effective March 31, 2003, we had involuntarily revoked our election to file
consolidated tax returns, due to the reverse merger. During the periods
subsequent to the reverse merger, the Company has continued to have operating
losses, both on a consolidated basis and individual company basis.
We
are
presently reviewing the tax consequences of this issue as well as the taxability
of the reorganization that occurred on March 31, 2003 and other transactions
that were related to the reverse merger and reorganization. This issue may
affect the amount of Net Operating Losses we may carry forward to future years.
The Company presently believes that no provision for taxes should be made in
the
financial statements at December 31, 2005, for any tax liability regarding
these
issues.
Notes
Payable at December 31, 2005, consisted primarily of a secured (by all assets
of
the Company) promissory note payable due April 30, 2006 of $1,000,000 with
interest currently payable at an annual interest rate of 8%, (also see Note
4),
and amount due to former E-BEAR shareholders, (unsecured) non-interest bearing,
totaling $150,000 regarding the acquisition of E-BEAR (see Note 4). Per Note
4,
the $150,000 note is due upon reaching certain revenue milestones in
2006.
Total
interest costs incurred and expensed for the years ended December 31, 2005
and
2004, and for the cumulative period from May 10, 2002 to December 31, 2005
was
$90,591, $4,627, and $554,758, respectively.
10. STOCKHOLDERS’
EQUITY
The
total
number of shares of preferred stock authorized to be issued by the Company
is
10,000,000 shares of Preferred Stock, $.01 par value.
The
total
number of shares of common stock authorized to be issued by the Company is
300,000,000 shares of Common Stock, $.01 par value. By written consent from
the
majority of stockholders on October 18, 2004, an amendment to the certificate
of
incorporation increased the number of authorized shares from 50,000,000 to
300,000,000. Each share of capital stock entitles the holder thereof to one
vote
at each meeting of the stockholders of the Company.
On
February 25, 2005, the Company entered into a Securities Purchase Agreement
(the
“SPA”) and a Registration Rights Agreement (the “RRA”) with the Van Wagoner
Private Opportunities Fund L.P. (the “Initial Investor”). Pursuant to SPA, on
February 25, 2005 (the “Closing Date”), the Initial Investor acquired 4,000,000
shares of the Company’s Common Stock for an aggregate purchase price of
$2,000,000.
The
SPA
permitted the Company to allow additional investors reasonably approved by
the
Initial Investor to acquire the Company’s common stock on identical terms as
those obtained by the Initial Investor at subsequent closings that occurred
during the thirty-day period following the Closing Date (the “Subsequent
Offering Period”). The Initial Investor, however, had the right to acquire up to
an additional 2,000,000 shares of the Company’s common stock at the first of any
such subsequent closings and, if no such subsequent closings occurred, then
upon
the expiration of the Subsequent Offering Period. The issuance of the shares
to
the Initial Investor was effected in reliance on the exemption from the
registration provisions of the Securities Act of 1933 provided by Regulation
D,
Rule 506.
The
Company also issued the Initial Investor a Warrant (the “Warrant”) pursuant to
the SPA and would issue any subsequent investors a like Warrant. The Warrant
relates to the purchase of a number of shares of the Company’s common stock
equal to three percent of the aggregate number of shares of common stock
acquired by an investor on the Closing Date or at any subsequent closing date
for each month (pro rated for partial months) that a Trigger Event
exists.
A
“Trigger Event” is defined as the inability, after June 24, 2005, of the holder
of the Warrant to sell any of the shares of common stock acquired pursuant
to
the SPA or the shares issuable upon exercise of the Warrant because of the
lack
of an effective registration statement authorizing the resale of such shares.
The Warrant expires on February 25, 2010. The Warrants are exercisable at a
price of $.50 per share and contain a net exercise or cashless exercise feature.
The Warrants also contain a full ratchet anti-dilution feature that requires
the
Company to reduce the exercise prices of the Warrant to the lowest price that
the Company sells its common stock (or is deemed to have sold its common stock
as the result of the issuance of an option or convertible security) after the
Closing Date. The total warrants that have accrued at December 31, 2005,
pursuant to this Trigger Event, are 1,785,540.
We
have
evaluated the terms of the Warrant using the guidance provided in SFAS No.
133,
“Accounting for Derivative Instruments and Hedging Activities,” and EITF No.
00-19. We have concluded that certain provisions in the terms of the Warrant
require us to record a warrant liability for the fair value of the warrants
accruing under the Trigger Event defined above. The holders of the Warrant
have
registration rights that require us to file, to have declared effective, and
to
maintain the effectiveness of a registration statement with the SEC to register
the resale of the common stock purchased and to also register the common stock
issuable upon exercise of the warrants. Under the guidance provided by EITF
No.
00-19, the ability to register stock is deemed to be outside of our control,
therefore, the potential shares that will be issued upon exercise of the
warrants are unknown, making the ultimate settlement of this Trigger Event
undeterminable at December 31, 2005. Accordingly, the fair value of the Warrant
at December 31, 005 is $610,792, and this amount has been recorded as a
liability in our consolidated balance sheet, and in our 2005 consolidated
statement of operations in other income and expenses, as “Change in fair value
of warrants”. This warrant liability will be adjusted to fair value at the end
of each future reporting period. The accounting for the Warrant as a liability
will terminate on the date the registration statement is declared effective
by
the SEC.
The
fair
value at date of grant for the Warrants granted above was $610,792 estimated
using the Black-Scholes option valuation model with the following
assumptions:
Expected
life in years
5
years
Risk
free interest rate
4.35%
Expected
stock volatility
99%
Expected
dividend yield
0%
During
the fiscal year 2005, an aggregate of 14,156,000 shares had been sold to 36
individual investors, including the Initial Investor, (of which 6,000,000 shares
were purchased by a single institutional investor), resulting in gross proceeds
to the Company of $7,078,000. All such shares are “restricted securities” within
the meaning of the 1933 Act. As a consequence, the investors demanded and were
granted certain registration rights which obligate the Company to register
such
shares under the 1933 Act. We are obligated to pay all expenses of such
registration process and granted customary indemnity and contribution rights
with respect thereto.
In
April
and June 2005, the Company issued an aggregate of 350,000 shares to two officers
as compensation for 2004 services. The shares were valued at $.90 per share
and
the expense was accrued on December 31, 2004. On August 31, 2005, the Company
issued to two new officers 250,000 shares of its restricted common stock as
compensation for taking executive positions with the Company. The shares were
valued at $.77 per share based on the closing market price at the date the
shares were issued, for an aggregate amount of $192,500. This expense was
included in stock-based compensation expense for the year ended December 31,2005.
In
April
2005, 118,535 shares of common stock were issued in connection with the
retirement of an aggregate of $114,978 of debt.
In
May
2005, 3,000,000 shares were issued to Pixiem, Inc. stockholders for the
acquisition of that company. These shares were valued at $1.8 million,
representing their fair market value based upon the closing sale price per
share
of the Company’s common stock for the trading day immediately preceding the
closing date of the acquisition. In October 2005, 237,179 shares were issued
for
the acquisition of Bijou Studios, Inc. The shares were valued at $.78 per share,
the market prices of our common stock on the last trading date prior to the
execution of the acquisition agreement (i.e., July 1, 2005), for a total value
of $185,000. In December 2005, a total of 188,297 shares were issued to E-Bear
stockholders for one-half of the acquisition price of E-Bear Digital Mobile
Software, Inc. The shares were valued at $150,000.
The
Company also issued 351,669 shares to consultants during the year for services
provided to the Company. The total stock-based compensation expense recorded
from the issuance of these shares for the year ended December 31, 2005 was
$271,263.
In
March
2005 and September 2005, 20,000 non-qualified stock options were exercised
by
one investor for an exercise amount of $8,000. In September 2005, 750,000
compensatory stock options were exercised by one officer in a cashless
transaction in exchange for 357,558 shares of common stock.
In
December 2005, the Company issued a total of 600,000 warrants to two advisory
board members as compensation for their services to the Company. The warrants
have an exercise price of $.50 per share. The total stock-based compensation
expense recorded from the issuance of these warrants in 2005 was
$249,500.
We
have
previously reported that in February 2003 David Coulter, former Chief Executive
Officer and majority stockholder of Junum, Inc. had filed several civil actions
against the Company and others in the Superior Court of the State of California
for the County of Los Angeles (Central District), and in the County of Orange,
California seeking more than $3 million in damages and other relief. The claims
filed in Orange County originally alleged unauthorized removal from the board
of
directors and breach of fiduciary duty. The claims filed in LA County alleged
a
breach of an employment contract, labor code violations, breach of a covenant
of
good faith and fair dealing, breach of a $1 million promissory note, and
intentional and negligent interference with prospective business and economic
advantage. The Company filed counter-claims against the former CEO for breach
of
fiduciary responsibilities and conversion, for which it is seeking damages.
The
original Orange County complaint became moot as a result of action taken by
the
Company’s shareholders. The LA County complaints were consolidated into one
action and the former CEO subsequently filed an amended complaint alleging
only
a breach of an employment contract, conversion, imposition of a constructive
trust and labor code violations, and sought damages in excess of $6.5
million.
On
June24, 2005, the LA County Superior Court entered an order denying the former
CEO’s
Motion for Summary Adjudication of his causes of action for alleged breach
of
contract, labor code violations and penalties, through which he had sought
more
than $1.8 million in damages. The Court found that there were numerous triable
issues of material fact, including whether the former CEO’s unsigned written
employment agreement was valid, the terms of such alleged agreement, and, even
if valid, whether the Company had any remaining responsibilities
thereunder.
On
September 15, 2005, the consolidated case was transferred to the Orange County
Superior Court by stipulation of the parties. A case management conference
has
been scheduled for April 20, 2006, at which time a trial date will likely be
set
and where we intend to vigorously defend our position in court. The Company
presently believes that the ultimate settlement of this case will not be
material to our financial condition.
In
a
separate case, David Bernard sued WinWin Gaming, Inc. in the United States
District Court for collection on the following two convertible promissory notes
that had been assigned to him: (1) a convertible promissory note in the amount
of $100,000 dated February 9, 2001 between Junum, Inc. and Banca Commerciale
Lugano; and (2) a convertible promissory note in the amount of $50,000 dated
February 9, 2001 between Junum, Inc. and GTS Gann Trading Services,
Inc.
On
March30, 2006, a settlement was reached whereby we will pay David Bernard $70,000
over an eight month period of time following the settlement date and issue
200,000 shares of our restricted stock with piggyback registration rights.
The
total settlement amount guaranteed in the payout to David Bernard is $210,000,
with any shortfall to be paid with the issuance of additional shares of our
common stock.
WinWin
is
involved in a potential litigation dispute related to rights in the ClanPass
Tournament System acquired by WinWin in an asset purchase agreement with Bijou
Studios, Inc. dated as of July 5, 2005 (refer to note 4). Several months after
the closing, a third party claimed an interest in the rights to the ClanPass
Tournament System. WinWin has suspended payments due under the asset purchase
agreement until this matter is settled with the third party. Management feel
this will not have a material adverse effect on Win Win.
In
addition to the foregoing, from time-to-time we may be involved in other
litigation relating to claims of alleged infringement, misuse or
misappropriation of intellectual property rights of third parties. We may also
be subject to claims arising out of our operations in the normal course of
business. As of the date of this filing on Form 10-KSB, we are not a party
to
any such other litigation that would have a material adverse effect on us or
our
business.
The
Company leases office space under operating leases which contains renewal and
escalation clauses. The Company has these rental agreements with non-related
parties for the offices occupied by WinWin Gaming, Inc. at $6,000 per month,
expiring June 2007; for the offices occupied by Win Win Shanghai at $7,400
per
month, expiring September 2011; for the offices occupied by Pixiem New Jersey
at
$6,000 per month, expiring July 2008; and for the offices occupied by Pixiem
Korea at $13,300 per month, expiring May 2007. Rental expense under operating
leases for 2005 was $251,398. Future minimum rental commitments for
noncancelable operating leases in effect as of December 31, 2005 are shown
in
the table below. The aggregate minimum rental commitments for such leases having
terms of more than one year are:
Year
Operating
Leases
2006
$
393,138
2007
276,752
2008
130,800
2009
88,800
2010
88,800
Thereafter
66,600
Aggregate
minimum lease commitments
$
1,044,890
Professional
Employer Organization
The
Company has entered into a contract with Administaff, Inc. to provide
professional employer organization ("PEO") services, also known as "employee
leasing", to the Company. Administaff’s services include payroll administration,
human resource administration, consulting on employee legal and regulatory
compliance, providing comprehensive benefits including retirement plans,
workers' compensation coverage, loss control and risk management and certain
other services. The Company has control over the day-to-day job duties of the
employees. Our contract with Administaff is subject to renewal on an annual
basis.
We
entered into a co-publishing license agreement with ESPN in September 2005.
Under this license agreement, we are to receive 60% of the net revenue for
the
mobile game downloads in 2006 and 55% of the net revenue for the mobile game
downloads in 2007 and 2008, and we are obligated to pay annual minimum license
fees, ranging from $350,000 in 2006, $550,000 in 2007, and $750,000 through
the
year 2008. This commitment is based on the sale of five mobile games listed
under this agreement from the date of their first launch with the carriers
for a
one-year period of time. A total of four games were launched in November and
December 2005. We were unable to launch our fifth game title due to the lack
of
interest by mobile phone carriers in the game title and play. We are currently
working with ESPN to bring in a new game title, that we have almost completed
and have also obtained preliminary acceptance to launch the game with various
carriers. We anticipate that ESPN will allow this game to be substituted in
and
launched as the fifth game title under this license agreement. As of December31, 2005, based on the recent launch of our games and our present current future
years’ revenue projections for these games, management believes that this
license agreement will be operated at a net profit to the Company.
In
April
2005, we entered into a license agreement with The All England Lawn Tennis
Club
(Wimbledon) Limited, whereby Wimbledon granted to us the exclusive right and
license to supply, sell, advertise and promote goods, merchandise and services
of any description with the use of the Wimbledon Identification, for a contract
period ending December 31, 2007. Under this license agreement, Wimbledon is
guaranteed royalties for each year of the agreement in the amount of $100,000.
After the guaranteed royalty has been met, Wimbledon is to receive forty percent
(40%) to fifty percent (50%) of the total revenues we receive in connection
with
the interactive games we develop based on the Wimbledon Championships. We
released one Wimbledon game in 2005, and are planning to release two additional
Wimbledon games in 2006.
On
December 5, 2003 the Board of Directors adopted the Company's 2003 Stock Option
Plan, which allows the Board of Directors to grant stock options to certain
employees, consultants, and directors at a price equal to 100% of the fair
market value of stock on the date of grant for incentive stock options and
as
low as 50% of the fair market value for non-statutory options. The stock option
plan also permits grants of options to purchase shares of restricted common
stock at a minimum price of $.01 per share. The maximum number of shares that
can be granted under the Plan is 20,000,000 shares and the maximum amount of
options that can be granted to one individual, can be no more than 5,000,000
shares. The option and vesting periods are determined by the Board of Directors,
but can be no more than 10 years after the date of which the option is granted.
The fair value of each option grant is estimated on the date of grant using
the
Black-Scholes option-pricing model.
During
2005, the Company granted qualified and nonqualified stock options to purchase
9,458,208 shares of the Company's common stock at exercise prices of $0.40,
$0.45, $0.54, $0.80, $0.92, and $1.05 per share.
As
of
December 31, 2005, the Company was obligated to issue 750,000 shares of the
Company’s common stock ,valued at $.40 per share on the date of grant, to an
officer of the Company, resulting in stock-based compensation expense of
$300,000. This amount was recorded on the balance sheet in the caption “Due to
officers-accrued compensation”.
Stock
option transactions to the employees and consultants are summarized as
follows:
The
above
table includes options issued as of December 31, 2005 as follows:
A
total
of 1,382,653 non-qualified options have been issued to consultants at exercise
prices of $.40, $.50, and $.72; a total of 5,060,000 qualified 3-5 year options
have been issued to employees of the Company, at exercise prices of $.40, $.45,
$.80, and $.90 per share; a total of 1,250,000 non-qualified 3 year options
have
been issued to advisory board members; and a total of 5,115,000 non-qualified
3-5-year options have been issued
to
directors and officers of the Company, at exercise prices of $.40, $.45, $.50,
$.54, and $1.05 per share.
The
following table provides certain information with respect to the
above-referenced stock options outstanding and exercisable at December 31,2005:
Exercise
Prices
Stock
Options
Outstanding
And
Exercisable
Weighted
Average
Remaining
Contractual
Life
- Years
$0.40
3,121,542
2.99years
$0.45
2,160,000
4.00years
$0.50
510,000
2.25years
$0.72
519,445
2.00years
$0.90
200,000
2.00years
$1.05
45,000
4.17years
.
There
have been no significant modifications of outstanding stock option
rewards.
The
fair
values at date of grant for the options granted above was $2,815,172 estimated
using the Black-Scholes option valuation model with the following
assumptions:
In
electing to continue to follow APB No. 25 for expense recognition purposes,
the
Company is obliged to provide the expanded disclosures required under SFAS
No.
123 for stock-based compensation granted in 2005 to employees and others,
including if materially different from reported results, disclosure of pro
forma
net loss and loss per share had compensation expense relating to the options
measured under the fair value recognition provision of SFAS No.
123.
The
Company's pro forma information for the years ended December 31, 2005 and 2004,
prepared in accordance with the provisions of SFAS No. 123, is provided below.
For purposes of pro forma disclosures, stock-based compensation is amortized
to
expense on a straight-line basis over the vesting period.
2005
2004
Net
loss as reported
$
(9,809,061
)
$
(7,029,063
)
Add:
total stock-based compensation expense included in reporting income,
all
awards, net of related tax effects (which were none)
1,023,717
1,614,000
Deduct:
total stock-based employee compensation expense determined under
fair
value based method for all awards, net of related tax effects (which
were
none)
In
2006
we entered into a Licensing Agreement with Yamaha Motor Corporation, U.S.A.
(“Yamaha”) whereby Yamaha granted to us an exclusive right and license to use,
reproduce and exploit the Yamaha Marks and Data Files in the design and
development of specific wireless games. The term of the agreement expires three
(3) years after the date of the first commercial sale of a Yamaha-branded
wireless game (the “Launch Date”). Yamaha is to receive royalties in the amount
of twenty percent (20%) of net revenue from wireless games and fifty percent
(50%) of net revenue from the sale of ring tones and wallpapers, with a minimum
guaranteed royalty to be paid in the aggregate for the term in the amount of
$130,000. At December 31, 2005, no games had been released under the Yamaha
brand. The first two Yamaha-branded games are expected to be released in July
and November 2006, respectively, with two additional Yamaha-branded games
scheduled to be released in February and April 2007, respectively.
Form
of Warrant issued in connection with settlement agreement is incorporated
by reference to Exhibit 4 to the 10-QSB quarterly report of the
Company
for the quarter ended September 30, 2003.
Cooperation
Agreement, dated December 15, 2003, between Win Win Consulting
(Shanghai)
Co. Ltd. and Shanghai Welfare Lottery Issuing Center is incorporated
by
reference to Exhibit 10.1 to the Form 8-K current report of the
Company
filed on January 2, 2004.
Form
of Subscription Agreement used for private placements is incorporated
by
reference to Exhibit 10.28 to the Annual report on Form 10-KSB
of the
Company for the fiscal year ended December 31, 2003.
Project
Cooperation Agreement, dated April 30, 2004, between Win Win Consulting
(Shanghai) Co. Ltd and Shanghai VSAT Network Systems Co. Ltd. is
incorporated by reference to the Company’s Quarterly Report on Form 10-QSB
for the quarter ended June 30, 2004.
Joint
Venture Agreement, dated as of September 30, 2005, by and between
Solidus
Networks, Inc., d/b/a PayByTouch Solutions and WinWin Gaming, Inc.
is
incorporated by reference to Exhibit 10.1 to the Current report
on Form
8-K filed on October 20, 2005.
*10.20
Security
Agreement, dated as of September 30, 2005, by WinWin Gaming, Inc.,
in
favor of Solidus Networks, Inc., d/b/a PayByTouch Solutions is
incorporated by reference to Exhibit 10.2 to the Current report
on Form
8-K filed on October 20, 2005.
*10.21
Secured
Promissory Note, dated September 30, 2005, by WinWin Gaming, Inc.
to
Solidus Networks, Inc., d/b/a PayByTouch Solutions is incorporated
by
reference to Exhibit 10.3 to the Current report on Form 8-K filed
on
October 20, 2005.
*10.22
Acquisition
Agreement, dated September 27, 2005, by and among WinWin Gaming,
Inc.,
E-Bear Digital Software Co., Ltd. (“E-Bear”) and the Shareholders of
E-Bear is incorporated by reference to Exhibit 10.1 to the Current
report
on Form 8-K filed on December 27, 2005.
10.23
Employment
Agreement, dated December 20, 2005, between WinWin Gaming, Inc.
and Peter
Pang.
10.24
Employment
Agreement, dated December 20, 2005, between WinWin Gaming, Inc.
and
Patrick Rogers.
10.25
Licensing
Agreement, dated December 15, 2005, between Pixiem, Inc. and Yamaha
Motor
Company.
10.26
Licensing
Agreement, dated September 23, 2005 between Pixiem, Inc. and C-Valley
(Beijing) Information Technology Co., Ltd.
10.27
Distributorship
Agreement, dated June 20, 2005 between Pixiem, Inc. and Advanced
Mobile
Solutions, Ltd.
10.28
Agreement,
dated August 3, 2005 between Pixiem, Inc. and Tira Wireless,
Inc.
10.29
Distributor
and Revenue Share Agreement, dated November 9, 2005 between Pixiem,
Inc.
and Tele-Mobile Company dba Telus Mobility.
10.30
License
Agreement, dated November 21, 2005 between Pixiem, Inc. and Paradox
Studios, Ltd.
10.31
License
Agreement, dated November 7, 2005, between Pixiem, Inc. and iScreen
Corporation.
10.32
Wireless
Pass Through Distribution Agreement, dated May 27, 2005 between
Pixiem,
Inc and Wireless Developer, Inc. dba Wireless Developer
Agency.
10.33
Service
Agreement, dated July 8, 2005 between Pixiem, Inc. and Cellmania,
Inc.
10.34
Partnership
Agreement, dated September 1, 2005 between Pixiem, Inc. and 2ThumbZ
Entertainment.
10.35
License
Agreement, dated April 1, 2005, between Pixiem, Inc. and The All
England
Lawn Tennis Club (Wimbledon) Limited.
10.36
Settlement
and Release Agreement, dated March 30,2006, between WinWin Gaming, Inc. and David Bernard.
*11.
Statement
re: computation of per share earnings reference is made to the
Consolidated Statements of Operations of the Consolidated Financial
Statements of the Company which are incorporated herein by
reference.
