Document/Exhibit Description Pages Size
1: 10KSB Annual Report -- Small Business 66 296K
2: EX-10.15 Material Contract 2 14K
3: EX-10.16 Material Contract 2 14K
4: EX-21 Subsidiaries of the Registrant 1 5K
5: EX-23.1 Consent of Experts or Counsel 1 6K
6: EX-23.2 Consent of Experts or Counsel 1 7K
7: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) 2± 9K
8: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) 2± 9K
9: EX-32 Certification per Sarbanes-Oxley Act (Section 906) 1 7K
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended in December 31, 2004 Commission File No.: 000-21566
WINWIN GAMING, INC.
---------------------------------------------------
(Name of small business in its charter)
DELAWARE 84-1219819
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8687 W Sahara, Suite 201 (702) 212-4530
Las Vegas, Nevada 89117 --------------
(Address of principal executive offices) (Issuer's telephone number)
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 |_|
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. |_|
State issuer's revenues for its most recent fiscal year: $13,987
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of February 25, 2005:
Common stock, $.01 par value: $13,784,362
The number of shares of the registrant's common stock outstanding as of February
25, 2005: 45,411,607 shares.
INDEX TO FORM 10-KSB ANNUAL REPORT
Page
PART I
Item 1. Description of Business.............................................1
Item 2. Description of Property.............................................8
Item 3. Legal Proceedings...................................................8
Item 4. Submission of Matters to a Vote of Security Holders.................9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............9
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................11
Item 7. Financial Statements...............................................19
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................19
Item 8A Controls and Procedures............................................20
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................20
Item 10. Executive Compensation.............................................23
Item 11. Security Ownership of Certain Beneficial Owners and Management.....25
Item 12. Certain Relationships and Related Transactions.....................27
Item 13. Exhibits...........................................................28
Item 14. Principal Accountant Fees and Services.............................30
Signatures....................................................................32
Financial Statements.........................................................F-1
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements and information relating to us
that is based on the beliefs of our management as well as assumptions made by,
and information currently available to, our management. When used in this
report, the words "anticipate", "believe", "estimate", "expect", "intend",
"plan" and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. These statements reflect
management's current view of us concerning future events and are subject to
certain risks, uncertainties and assumptions, including among many others: the
risk factors described below under "Item 6. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Risk Factors that May Affect
Future Operating Results," our potential inability to raise additional capital,
our potential inability to obtain licenses to develop lottery programs in our
target markets or to exploit the licenses currently held by us, our potential
inability to compete with other lottery companies that may be more experienced
and better capitalized than we are, changes in domestic and foreign laws,
regulations and taxes, changes in economic conditions, uncertainties related to
the legal systems in our target markets, including China's legal system and
economic, political and social events in China and other target markets, a
general economic downturn, a downturn in the securities markets, Securities and
Exchange Commission regulations which affect trading in the securities of "penny
stocks," and other risks and uncertainties. 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.
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. and Win Win Consulting (Shanghai) Co. Ltd. Also,
we have assumed a conversion rate of $1 to 0.12 Chinese Yuan Renminbi ("RMB")
throughout this annual report in all instances where such currency conversion is
required.
ITEM 1. DESCRIPTION OF BUSINESS.
OUR BUSINESS AND MISSION
We offer complete end-to-end lottery and gaming services and consultation in
partnership with foreign governments and charitable organizations who are
considering lotteries and/or games as a method of generating revenue. The
services that we provide include consultation regarding equipment, technology,
management and marketing.
Our corporate mission is to work with governments all over the world, in helping
them operate their lotteries more efficiently and effectively in a way that
benefits all parties involved, including the national and local governments, the
citizens of each country and our stockholders. The primary purpose of conducting
a lottery is that a portion of the proceeds from the lottery games are earmarked
to fund important charitable and humanitarian programs, such as education,
hospitals, international and local charitable organizations (such as the Red
Cross), churches, airports, roads and highways, hydro power dams, desalinization
plants, bridges, hotels, sports and convention centers and more.
HISTORY AND BACKGROUND
Our corporate name is WinWin Gaming, Inc. We were incorporated on December 30,
1992 in 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. Since March 31, 2003,
there has been a change in the business nature, management and control of the
company and we currently operate under the name WinWin Gaming, Inc. We conduct
our operations through two wholly-owned operating subsidiaries, Win Win, Inc., a
Nevada corporation, and Win Win Consulting (Shanghai) Co. Ltd., a company
organized under the laws of the People's Republic of China. Our executive
offices in the United States are located at 8687 W Sahara, Las Vegas, Nevada
89117. Our telephone number is (702) 212-4530.
In September 2002, while prior management was operating under the name Junum
Incorporated ("Junum"), a secured lender foreclosed on substantially all of the
operating assets of Junum because of a default on the repayment of obligations
to the secured lender. Thereafter, on October 21, 2002, Junum transferred its
remaining assets to the holders of its Series C Preferred Stock in exchange for
all of the issued and outstanding shares of its Series C Preferred Stock,
thereby redeeming all then-outstanding preferred stock. As a result of the
aforementioned foreclosure and stock redemption, all of Junum's assets were
distributed and all of Junum's operations were discontinued.
In December 2002, Junum sold its wholly-owned subsidiary, Junum.com, Inc., to a
creditor in exchange for the forgiveness of approximately $300,000 in debt. At
such time, Junum.com, Inc. had no assets (other than rights to the Junum name),
no operations and approximately $2,000,000 in liabilities. Junum.com, Inc.
subsequently had its corporate charter revoked by the state of Nevada.
Effective December 31, 2002, we changed our name to WinWin Gaming, Inc., and
formed Win Win Acquisition Corp. We capitalized Win Win Acquisition Corp. with
22,512,000 shares of our common stock, which WinWin Acquisition Corp. then used
to acquire 100% of the capital stock of Win Win, Inc., a Nevada corporation. In
addition to the 22,512,000 shares, the former stockholders of Win Win, Inc. also
received a $5,000,000 senior secured debenture, secured by 100% of the stock of
both Win Win Acquisition Corp. and Win Win, Inc. However, due to the failure of
a closing condition, the acquisitions of Win Win Acquisition Corp. and Win Win,
Inc. were rescinded and renegotiated effective March 31, 2003, and an amended
and restated stock exchange agreement was consummated on substantially similar
terms and conditions, except that the total number of shares of our common stock
issued for the acquisitions was reduced from 22,512,000 shares to 18,522,853
shares. On March 19, 2004, the $5 million debenture that we issued in connection
with the acquisition of Win Win, Inc. was converted by the debenture holders in
accordance with the terms of the debenture into 100,000 shares of our common
stock.
SUMMARY OF CURRENT AND PLANNED OPERATIONS
Current Operations
We operate through our two wholly-owned operating subsidiaries. Our operations
presently consist primarily of generating consulting revenue from the Shanghai
Welfare Lottery Issuing Center (SWLIC) through the marketing and sale of welfare
lottery tickets in Shanghai, China. The SWLIC is currently our only client and
we are dependent upon the SWLIC and the Shanghai Welfare Lottery for all of our
revenues.
Currently, approximately 30%-35% of the proceeds from the sale of lottery
tickets in Shanghai is used for charitable and humanitarian purposes;
approximately 50% of such proceeds is disbursed to the winning lottery ticket
holder(s) and the remaining 15% to 20% is disbursed to all third parties who
provide services to the SWLIC in order to effectuate the Shanghai lottery,
including us. Our current percentage of the total lottery ticket revenues in
Shanghai is in the range of approximately 1.65% to 8.6%. If we sell the tickets
directly, we can earn higher commission rates of up to 8.6%. We are currently
negotiating with the Chinese government to increase our consulting revenue
percentage from the present 1.65% rate, and to have a more prominent role in the
distribution and promotion of the tickets for future welfare lotteries that we
may launch in other provinces in China.
On December 15, 2003, through our Chinese affiliate, Win Win Consulting
(Shanghai) Co. Ltd. ("WinWin Shanghai"), we entered into a Cooperation Agreement
with the SWLIC and a TV Cooperation Agreement with SWLIC to broadcast our weekly
television show.
2
SWLIC is a governmental authority that is in charge of the China Welfare Lottery
games in the Shanghai municipal district. The SWLIC entered into the Lottery
Cooperation Agreement and the TV Cooperation Agreement with us in order to
improve its ticket sales, bring integrity back to its lottery by electing to use
our secure bar coded instant tickets and more distribution of instant lottery
games in the Shanghai municipal district.
Pursuant to this three year Cooperation Agreement, SWLIC retained WinWin
Shanghai, our wholly-owned subsidiary, on an exclusive basis to provide advice
and counsel on lottery management, lottery television programs, lottery sales,
marketing, promotion, distribution and training of sales and marketing personnel
associated with the foregoing relating to a new online instant lottery ticket
game or series of games recently approved by the Central Government of China for
rollout in the Shanghai municipal district. In addition, WinWin Shanghai is
obligated to provide the services necessary to accomplish the production of a
new online instant lottery ticket television program tied to the games for
broadcast with one or more of Shanghai Lottery's partners at local television
stations.
In July 2004, we launched our "Slam Dunk" brand instant ticket lottery games in
Shanghai, China. The inaugural "Slam Dunk" tickets include a series of three
instant ticket lottery scratch off games offering a wide range of prizes
designed to appeal to a broad market of players. The initial run of tickets
includes five million of each game (three different games in three different
Chinese currency denominations) for a total of fifteen million tickets; however,
only ten million of the tickets have been deployed to date. These tickets are
currently being distributed and sold in Shanghai with tests planned for other
provinces in China. Our goal is to continue selling these tickets until a new
line of tickets is deployed, which is estimated to be during the third or fourth
quarter of 2005. SWLIC, as part of the Cooperation Agreement mentioned above,
was responsible for the deployment of the tickets and was committed to handle
all of the distribution and management of retail sales.
There has been a delay in full ticket deployment by the SWLIC, which had a very
significant impact on our revenues and operations in 2004. The delay resulted
primarily from the implementation of new bar coded online verification ticket
scanning machines at the various retail outlets managed by the SWLIC. These
machines are used to validate the instant tickets for winners and track and
report sales; and therefore, help to ensure the integrity of the game and
provide much needed security for the Chinese market. We are actively working
with the SWLIC to resolve these issues. We intend to assist SWLIC in
distribution later in 2005 by seeking to establish alliances with vendors of
online verification equipment. We are also seeking permission from the SWLIC to
commence our own distribution of lottery tickets through various retail outlets
and conducting our own promotional sales shows in China.
The "Slam Dunk" ticket series is tied directly to our "Slam Dunk" weekly lottery
TV game show series which was launched on August 7, 2004 on the Oriental TV
Station in Shanghai, China. The "Slam Dunk" TV game show is produced by Sande
Stewart Television Inc., a leading U.S. television game show production company,
well known for its production of the Powerball Instant Millionaire game show for
14 different U.S. state lotteries. According to the SWLIC, the "Slam Dunk"
tickets are the first ever to be designed by a U.S. lottery consultant for the
Shanghai welfare lottery and marketed with a U.S. produced TV game show. We have
been told by the Chinese government that our game show is the first western
produced game show in China.
WinWin Shanghai will bear all out-of-pocket costs relating to the implementation
of the foregoing services during the first year (July 2004- July 2005) of the
three year term of the Cooperation Agreement, including the prizes paid out to
winners on our TV game show. During the second and third years of the
Cooperation Agreement, the cost of implementation and other expenses would be at
the expense of the lottery operation itself and paid out of the gross revenues
generated by the games, before the various percentage distributions from the net
proceeds of the lottery.
The Cooperation Agreement also provides that SWLIC will ensure that at least one
television station in the Shanghai municipal district will broadcast 50 episodes
of our new online instant lottery television game show. The shows will broadcast
at least once per week during prime time for 50 weeks per year. Each episode
would be at least 20 minutes in length and would be tied to the welfare ticket
games currently being run in Shanghai (presently our "Slam Dunk" Game).
3
In consideration for the services provided by WinWin Shanghai, we receive, in
accordance with the Cooperation Agreement, on a quarterly basis a percentage of
the aggregate gross revenue of the games that are tied to the television shows
and the specific games that the parties designate in advance, that will benefit
directly from WinWin Shanghai's consulting services, advice, action, investment
in out-of-pocket expenses, know-how or other intellectual property provided. The
percentage payable to WinWin Shanghai will be adjusted up or down in the second
and third years of the term of the Cooperation Agreement based on increases or
decreases in overall revenues derived from the Lottery Games.
Chinese Expansion
We believe that we are the first U.S. company to be offered this opportunity to
work with the China Welfare Lottery. The China Welfare Lottery has also
expressed its desire to potentially allow us in the future to expand the
Shanghai project into neighboring local provinces; a national lottery game, and
ultimately, a nationally televised TV lottery game show.
Chinese Government Ministry of Information's statistics indicate that welfare
lotteries in China generated approximately $2 billion in revenues in 2002, $2.4
billion in revenues for 2003 and $2.7 billion in revenues in 2004. This
represents a 13% increase in welfare lottery ticket sales from 2003 to 2004.
These statistics also indicate that the cumulative welfare lottery ticket sales
from 1987 to 2004 were $14.7 billion.
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. Casinos in
Macau are producing, approximately 37% of Macau's annual budget through gaming
taxes. Management believes that mainland China may want to similarly generate
revenues through gaming taxes in the future.
Worldwide Expansion
We also hope to expand our lottery operations to other countries in Asia and
throughout the world. If our current lottery and gaming operations in China are
successful, we will be able to showcase our Chinese operations as means of
demonstrating to other countries our capabilities. Success for us in China,
therefore, could greatly assist us in our expansion efforts.
To support our international expansion, we also plan to offer a complete menu of
lottery, bingo and casino games. The need for government approval will have an
effect on what products we can offer in any particular country or other
political subdivision. In the future, we also intend to identify and partner up
with other companies in order to offer the latest state-of-the-art Internet and
Intranet technology, enabling us to link video lottery, gaming and bingo
terminals nation- or world-wide. Also, via the Internet, our long term goal is
to be able to link countries around the globe in order to create the world's
first multi-national super jackpot. Another goal in our business plan is to
establish and operate both land-based and -Internet casinos. We intend to hire,
train and manage local citizens to run the day-to-day operations, further
benefiting the local economy and the people in each country in which we would
operate.
We intend to offer a complete "turn-key" service providing equipment, training,
management and marketing, for lottery and gaming operations. We plan to use
state-of-the-art technology to prevent access to our lottery and other gaming
related operations from jurisdictions where such activity would not be legal,
such as the United States. We will not accept any business, including online
gaming, lotteries or other games, from any person within the United States.
BUSINESS STRATEGY AND OPERATION
We intend, as the primary deliverable from our consulting services, to customize
each lottery and gaming operation to the maximum benefit of each country that we
operate in and all of its citizens. Our live, weekly-televised lottery game show
that is connected to an instant win scratch ticket should help to increase
awareness of our game and therefore increase the sale of the welfare lottery
tickets we design in China. We intend to implement or distribute on-line lotto
4
and/or -Internet/Intranet lottery and wireless systems. In addition, if we can
obtain licenses in various other jurisdictions and raise the appropriate
funding, we will evaluate the potential for operating casinos in such
jurisdictions, where we are allowed to do so under applicable law.
Once an agreement is entered into and a license to operate is granted to us or
one of our affiliates, it generally takes between two and three months to
design, print and distribute the lottery tickets and begin to generate revenue.
On average, at the present time we anticipate that approximately 50% of the
ticket sales would go toward prizes. After we recoup our initial costs, the
balance of the revenue would be split between us, our regional partners, where
applicable, and the government of the country in which the lottery is licensed.
The percentage split will vary according to each country and the agreement or
lottery license we can obtain.
In some cases, a country seeking our assistance may already have a lottery in
place, but the lottery may be ineffective for several reasons. In such cases, we
would be able to help the country's existing lottery increase sales with our
technology and marketing expertise. We can also operate under a separate private
license to fund specific "stand alone" projects. Finally, by providing new games
in addition to the existing lottery games, we would be able to help the country
fulfill its humanitarian project funding goals much faster.
PRODUCTS
TV Game Show Production and Televised Games
In association with leading lottery-style game show producer, Sande Stewart, we
produce a televised game show linked to an instant ticket lottery in Shanghai,
China. We have aired a series of 21 live, weekly-televised lottery game shows in
2004 that are tied directly into the instant ticket games. The combination of
weekly shows with televised winners has been shown in other lotteries to be a
powerful marketing tool and our management believes that this strategy can
significantly increase lottery sales in virtually every country in which it will
be used.
The copyright to the television episodes is held jointly by SWLIC, OTV and us.
Although, Sande Stewart Television is the exclusive owner of all intellectual
property rights in the show and has granted us a license to use such rights in
China and other Asian countries subject to the payment by us of the applicable
license fees. The content of the show must be approved by regulatory agencies in
China before it is broadcasted. The theme for the show and the instant ticket
game is the sports theme we created known as Slam Dunk. We launched the instant
ticket game in Shanghai in July 2004 and the TV game show first broadcasted the
following month on August 7, 2004.
Instant Games
Instant Games include scratch-off tickets and pull-tabs or break-open tickets.
Instant games can be provided quickly and create a multitude of winners. We
design, print and then distribute tickets through various point-of-sale
locations throughout each local region that we operate in (currently, only in
Shanghai, China). We implement strict security measures when creating tickets to
ensure that the integrity of the games cannot be compromised. Tickets can be
customized to include a picture of the humanitarian project to be funded as well
as to include a corporate sponsor's name on the each ticket. Once the funding
goal is met, new games can be created for a new humanitarian purpose.
Video Lottery Terminals
Although we have not yet derived any revenue from Video Lottery Terminals, and
this product is subject to Government Regulation and approval in China, we
intend to sell and distribute Video Lottery Terminals in China if and when we
receive the requisite approvals. We have not yet applied for any of these
approvals. Video Lottery Terminals are similar in design to the Video Poker
5
machines seen frequently in U.S. casinos, with the exception that the play
methods and payouts are based on lottery games and will be tied into the welfare
lottery. A single VLT machine can contain a menu of several games including
poker, blackjack, lineup and others. Wagers can be made by coin or bill.
Internet and On-Line Games
Subject to obtaining requisite governmental approvals and licenses, we intend to
offer the world's most secure, comprehensive Internet and on-line gaming
systems. Cyber terminals and on-line machines can be placed at locations
throughout a country in which our services are launched, providing instant
access to even the most remote regions. We intend in the future to also
establish websites that offer a variety of lottery games and a complete on-line
casino. Internet casinos provide the opportunity to create the first ever
on-line worldwide gaming tournaments such as the World Series of Blackjack,
Craps, Baccarat, etc. where participants from around the world can compete. In
addition, the Internet enables us to expand our lottery games into a "Powerball"
style format. By connecting several countries worldwide, we may potentially
offer the world's largest international Super-Jackpot creating the first billion
dollar winner.
Intranet Games
Subject to obtaining requisite governmental approvals and licenses, we intend to
offer state-of-the-art Intranet lottery, gaming and bingo technology. We intend
to employ the latest bingo technology consisting of video bingo terminals and
progressive bingo that allows up to 600 games to be played simultaneously.
Locations throughout a country can be linked via secure Intranet connections to
create larger national jackpots. By utilizing this same technology, we can also
link lottery sites and terminals around a nation to provide bigger jackpots and
expand the market.
Wireless Games
We are now in the initial stages of developing our wireless game platform and
content in order to provide various types of entertainment games and eventually,
lottery gaming content for mobile phones and other wireless devices throughout
China and potentially other countries as well. Our ultimate goal is to expand
our wireless business across China and become one of the leading game content
providers for the cellular industry in China and other countries.
In the June 9, 2004 edition of the Shanghai Daily newspaper, it was reported
that revenues from the handset/mobile phone game market in China are predicted
to double from 2003 totals to up to $72.3 million in 2004. As of April 2004,
China Mobile and China Unicom reported a combined total of more than 250 million
customers nationwide.
Casinos
Our officers and directors have significant experience and relationships in
developing, operating and marketing land-based and river boat casinos in a
variety of jurisdictions. We have expertise in all related areas including site
development, design supervision, construction, casino management, food and
beverage, entertainment and more. We intend to capitalize on this experience in
the future by developing casinos and providing casino related services.
SALES AND MARKETING
From our initial roll-out in Shanghai China and all subsequent roll-outs, the
primary marketing tool that we utilize is (and will be) live, weekly-televised
lottery game shows. We retained Sande Stewart Television, Inc., a leading U.S.
television lottery game show production company, to produce the Chinese TV game
show. Since 1996, Stewart Television, Inc. has produced the popular "Fun and
Fortune" TV lottery game show tied to the Missouri State Lottery. Now in its
ninth year of broadcast, the game has experienced increased sales in each
successive year averaging ticket sales of almost $600,000 per week. Sande
Stewart Television, Inc. also produces the Powerball Instant Millionaire game
show encompassing 14 different U.S. state lotteries. We also intend to employ
standard marketing channels, including TV commercials, print media, outdoor
advertising and radio in the Shanghai market.
6
Historically, TV lottery game shows have produced positive effects on the
market, increasing sales in virtually every country in which they have been used
without cannibalizing pre-existing sales channels. We will also employ extensive
sales strategies and media advertising to support our endeavors.
CORPORATE STRUCTURE
We are a Delaware corporation. We have the following subsidiaries:
o Win Win Acquisition Corp., a Nevada corporation. It owns 100% of the
outstanding common stock of Win Win Inc.
o Win Win Inc., a Nevada corporation.
o 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.
o Lucky Win Win Cambodia, Inc., a Cambodian corporation. This entity
operated our Cambodian lottery business. This company was inactive
at December 31, 2004 and the business in Cambodia discontinued in
2004.
COMPETITION
The lottery and gaming business and related activities are 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 all compete with us.
REGULATION
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 significant 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. 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.
EMPLOYEES
As of the February 25, 2005, we had eight full-time personnel and two part-time
employees at our Las Vegas, Nevada location. All of these personnel are either
part of our management team or provide administrative or business development
support to our China operations. We have seventeen employees in our Shanghai,
China office all of whom are in operations, marketing, accounting and
administration.
7
None of our employees or other personnel is represented by a labor union, and
management considers our relationships with our employees to be satisfactory.
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.
ITEM 2. DESCRIPTION OF PROPERTY.
Our executive offices occupy approximately 4000 square feet of newly-renovated
space at 8687 W Sahara, Las Vegas, Nevada 89117. As of December 2004, we
currently have 30 months remaining on our Las Vegas office lease at a monthly
rental rate of $6,000. This office space consists of administrative offices,
conference rooms and a reception area.
The office of Win Win Shanghai consists of 250 square meters, located in the
XuHui District of Shanghai. These offices are 50 meters away from the offices of
SWLIC. The current lease expires in September 2005. We plan to renew the
existing facility or relocate to a similar facility for another year at close to
the current rental rate of approximately $5,500 per month, which does not
include utilities.
ITEM 3. LEGAL PROCEEDINGS.
David B. Coulter ("Coulter"), a former officer and director and a stockholder of
Junum Incorporated (the predecessor of WinWin Gaming, Inc.), who acted as the
CEO and Chairman of Junum Incorporated, has 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. These actions were filed in February 2003.
The Los Angeles complaint alleged a breach of an employment contract, breach of
fiduciary duty, and various other claims, and sought damages in excess of
$3,000,000 and other relief. All of the allegations in such complaint relate to
events that occurred prior to the acquisition of Win Win Inc., our operating
subsidiary, and prior to the current board and management becoming involved with
the company. We are vigorously contesting these claims and have filed
counter-claims against Coulter for fraud and misappropriation of corporate
assets, and we are seeking substantial damages.
The complaint filed in Orange County sought a determination as to the identity
of the lawfully-appointed directors of the Company. Coulter claimed that
pursuant to the certificate of incorporation of the Company only the board of
directors could fill vacancies on the board and he challenged a written consent
of the stockholders of the Company (the "Written Consent") that authorized
Coulter's removal from the board effective October 18, 2002 and the appointment
of two new directors. Coulter also claimed that his removal from the board of
directors was invalid because it included affirmative votes under a proxy that
Coulter claimed went beyond the authority of such proxy. The trial court found
that the bylaws permitted the appointment of the two directors by Written
Consent and that there was insufficient evidence as to whether the proxy holder
had improperly voted for Coulter's removal. Coulter then filed an appeal with
the Court of Appeals of the State of California, Fourth Appellate District
(Division Three) (the "Appellate Court").
On July 21, 2004, the Appellate Court upheld the appointment of the two
directors who were appointed by the Written Consent, but reversed the trial
court decision with respect to Coulter's removal from the board. Thereafter, on
July 28, 2004, a majority of the stockholders of the Company removed all the
board members, including Coulter (to the extent he was a board member), and
appointed the current board members to the board, thereby making moot any effect
of the Appellate Court's decision.
The next trial date is in May 2005, in which we intend to vigorously defend our
position in court.
8
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
On October 18, 2004, stockholders holding 23,890,492 shares of our common stock,
constituting a majority of our outstanding common stock, delivered to us written
consents that approved our 2003 Stock Plan and approved an amendment to our
certificate of incorporation that increased the number of authorized shares of
our common stock from 50,000,000 shares to 300,000,000 shares. Reference is made
to our information statement on Schedule 14C, filed with the Securities and
Exchange Commission on November 10, 2004, for additional information regarding
this matter.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK
Our Certificate of Incorporation, as amended, authorizes 300,000,000 shares of
common stock, $.01 par value. As of December 31, 2004, we had 41,411,607 shares
outstanding, which were held by 758 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, 2004, 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.
Closing Bid Prices (1)
High Low
YEAR ENDED DECEMBER 31, 2004
1st Quarter $1.01 $0.60
2nd Quarter $2.48 $1.05
3rd Quarter $2.40 $1.20
4th Quarter $1.29 $0.60
YEAR ENDING DECEMBER 31, 2003
1st Quarter $1.40 $1.40
2nd Quarter $2.50 $1.60
3rd Quarter $1.35 $1.35
4th Quarter $1.30 $0.75
-----------------------------
(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 February 25, 2005, the closing price of our common stock was $0.86 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)
9
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.
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 WinWin Shanghai. Furthermore, dividend payments to us from WinWin
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, 2004 with respect
to compensation plans (including individual compensation arrangements) under
which our equity securities are authorized for issuance.
[Enlarge/Download Table]
------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (a)
------------------------------- ---------------------------- ---------------------------- ----------------------------
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS(1) 4,174,445 $ .51 15,825,555
------------------------------- ---------------------------- ---------------------------- ----------------------------
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS(2) 3,542,500 $0.50 N/A
------------------------------- ---------------------------- ---------------------------- ----------------------------
TOTAL 7,716,945 $ .51 15,825,555
------------------------------- ---------------------------- ---------------------------- ----------------------------
(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
4,199,445 of which 4,174,445 remain outstanding at December 31, 2004.
WARRANTS
As of December 31, 2004, we had outstanding warrants to purchase 7,091,181
shares of common stock at exercise prices ranging from $.25 to $.75 per share.
10
REGISTRAR AND TRANSFER AGENT
Our registrar and transfer agent is Integrity Stock Transfer, 2920 N. Green
Valley Parkway, Building 5, Suite 527, Henderson, Nevada 89014; 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 fiscal year 2004 and is not being repeated in this annual report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since our inception on May 10, 2002, we have been engaged in obtaining licenses
to operate lotteries and gaming operations throughout the world, including
directing and supporting marketing and sales of lottery tickets in foreign
countries. Currently the focus of our operations is in the People's Republic of
China ("PRC"). The market for instant lottery tickets in the PRC, for example,
is several billion U.S. dollars. Obtaining the right to operate, even in
partnership with another local PRC entity, is not an easy task. However, we have
been thus far successful in pursuing a partnership with the SWLIC and we are
optimistic that the start up work that we conducted as a development stage
company and the business associations established by us during that period, will
result in revenues for us in 2005.
Currently, our only source of revenues is from consulting services that we
provide to the SWLIC in connection with the Shanghai Welfare Lottery. The SWLIC
is our only client at this time and any revenues we currently generate result
from the services we provide to the SWLIC and the Shanghai Welfare Lottery.
Approximately 30%-35% of the proceeds from the sale of lottery tickets in
Shanghai is used for charitable and humanitarian purposes; approximately 50% of
such proceeds is disbursed to the winning lottery ticket holder(s) and the
remaining 15% to 20% is disbursed to all third parties who provide services to
the SWLIC in order to effectuate the Shanghai lottery, including us. Our current
percentage of the total lottery ticket revenues in Shanghai is in the range of
approximately 1.65% to 8.6%. If we sell the tickets directly, we can earn higher
commission rates of up to 8.6%. During the period from July 11, 2004 (the launch
of the Slam Dunk Lottery in Shanghai) through December 31, 2004, we generated
$4,475 in revenues as a result of the consulting services we provide to SWLIC in
connection with the Shanghai Welfare Lottery. We are currently negotiating with
the Chinese government to increase our consulting revenue percentage from the
present 1.65% rate, and to have a more defined role in the distribution and
promotion of the tickets for future welfare lotteries that we may launch in
other provinces in China.
There are several other areas where revenues could potentially be generated from
our operations. To date, we have not generated any revenues from these potential
revenue sources. These areas include television production and commercial time
sales, product placement fees, and corporate sponsorships. Also revenues could
potentially be derived from the operation and sale of Video Lottery Terminals,
the management of land based casinos and the sale and distribution of wireless
games.
Our ability to move forward in the PRC as well as other venues will be dependent
on our ability to attract sufficient additional funds to allow us to design,
market, promote, broadcast and sell lottery tickets and television programs
linked to those tickets.
With a population over 1.4 billion and a cultural propensity to wager, China can
potentially be the single most lucrative lottery market in the world. 2004 China
welfare lottery sales were estimated to be $2.7 billion dollars (up from $2.4
billion in 2003).
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SWLIC is exerting aggressive efforts to recruit investors who may be willing to
invest in the capital equipment necessary to deploy our Slam Dunk game in
exchange for a percentage of the revenue. The potential for a quick return on
the investment is high, especially since SWLIC has recently revised its policy
to allow such equipment to also dispense other lottery tickets, such as lottos,
through these machines. We are considering making such investment as well,
especially in view of the incremental revenue that such investment might bring
to our revenue portfolio.
In order for us to succeed in Shanghai, there must be a sufficient number of
lottery ticket distribution outlets that sell our Slam Dunk lottery tickets. To
date, the SWLIC has not been able to provide us with a sufficient number of
distribution outlets and as a result we have generated only marginal revenues
($4,475 in fiscal year 2004) in Shanghai. One reason that the SWLIC failed to
fully deploy sufficient distribution outlets relates to a new technology (new to
the Shanghai Welfare Lottery) that we utilized in our Slam Dunk game. This
technology is bar code technology that ensures authenticity of lottery tickets
in order to bring integrity back to the welfare lottery market in the PRC. This
new technology requires distribution outlets to acquire bar code equipment that
was not necessary with prior Shanghai Welfare Lottery tickets. As a result many
distribution outlets that previously distributed lottery tickets for the SWLIC
were unwilling to make the capital expenditure necessary to acquire such
equipment and were, therefore, unable to distribute our Slam Dunk tickets.
In order for us to breakeven in fiscal year 2005 based on our current overhead
expenses and anticipated revenue sharing percentage for 2005, we estimate that
the Shanghai Welfare Lottery and lotteries in other provinces in the PRC that we
expect to be involved in, must sell in 2005 a daily average of 360 tickets
through at least 2,200 lottery distribution outlets. Presently the Shanghai
Welfare Lottery sells through only approximately 200 distribution outlets. We
expect that the number of distribution outlets in Shanghai to increase in 2005.
It is difficult to project how many distribution outlets will open next year and
how many tickets will be sold by such outlets. However, plans are already made
to deploy distribution outlets in other provinces where the capital equipment
infrastructure is already in place. Some of these provinces already have over
5,000 outlets up and running and hence the barriers to increasing the number of
outlets are low. We would require additional licenses in order to manage
lotteries in these other provinces.
Because of the present development stage status of our company and our current
welfare lottery activities and other factors, we will need to arrange additional
financing through the sale of our stock or make other arrangements in 2005.
In evaluating our financial condition and operating performance, we began an
initiative to critically reassess our current and long-term business plan and
capital requirements. While the validation of our business plan is ongoing, we
have identified and begun to implement some of the plan's critical components:
1) We have strengthened our financial position with the receipt of an
aggregate of $2,000,000 in private equity financing on February 25,
2005.
2) We further enhanced our liquidity position by entering into one year
revolving credit arrangements with two of our directors, which
aggregate $1,000,000 ($500,000 each) on March 16, 2005.
3) We resolved outstanding liabilities from our predecessor business
Junum Incorporated, thereby removing a total potential liability of
more than $598,229 in 2004.
4) We refocused our operational strategy in 2004 by redirecting almost
all of our resources to the largest lottery market in the world, the
PRC.
5) We will be looking to reduce our operating overhead costs incurred
in the PRC and our Las Vegas offices in 2005.
12
6) We have applied for 8 different trademarks in China during 2004 (4
in English and 4 in Chinese). We expect these intangible assets to
have a value in excess of their recorded amounts on the accompanying
financial statements to this Form 10-KSB filing.
We believe that our current available working capital, with the aggregate
proceeds of our capital raising activities in the first quarter of 2005 of
$2,000,000 and the availability under revolving credit lines with two of our
directors totaling $1,000,000, should be adequate to sustain our operations at
our current levels through the end of fiscal year 2005. If, however, sufficient
funds are not available from our operations at that point, we will need to
arrange additional financing or make other arrangements. There can be no
assurance that additional financing would be available or, if it is available,
that it would be on acceptable terms.
RESULTS OF OPERATIONS
Fiscal Year ended December 31, 2004 compared to December 31, 2003
The following table summarizes the results of our operations during the fiscal
years ended December 31, 2004 and 2003 and provides information regarding the
dollar and percentage increase or (decrease) from the current fiscal year to the
prior fiscal year:
[Enlarge/Download Table]
-------------------------------- ----------- ----------- ----------- -----------
PERCENTAGE
INCREASE INCREASE
LINE ITEM 12/31/04 12/31/03 (DECREASE) (DECREASE)
-------------------------------- ----------- ----------- ----------- -----------
Revenues $ 13,987 $ 7,415 $ 6,572 89%
-------------------------------- ----------- ----------- ----------- -----------
Selling, General and
Administrative Expenses 3,193,237 933,353 2,255,884 242%
-------------------------------- ----------- ----------- ----------- -----------
Stock Based Compensation Expense 4,460,016 581,295 3,882,721 668%
-------------------------------- ----------- ----------- ----------- -----------
Total Operating Expenses 7,653,253 1,514,648 6,138,605 405%
-------------------------------- ----------- ----------- ----------- -----------
Net income (loss) (7,029,063) (3,016,342) 4,012,721 133%
-------------------------------- ----------- ----------- ----------- -----------
Earnings (loss) per share of
common stock (0.18) (0.13) 0.05 38%
-------------------------------- ----------- ----------- ----------- -----------
During the fiscal year ended December 31, 2004, we incurred a net loss of
$7,029,063 as compared to a net loss of $3,016,342 for the prior year. This
represents a 133% increase in net loss from last year to this year. During the
period from inception (May 10, 2002) through the end of fiscal year 2004, we
have incurred a loss of $11,679,173.
The increase in net loss is attributable to:
o expenses incurred relating to being in the development stage with
respect to the establishment of our operations in China; including
the pre-production and production of our TV game show in China and
the marketing and promotion of our Slam Dunk brand;
o an increase in corporate salaries and corporate overhead at our Las
Vegas office due to the recruitment of key employees in that office;
and
o an increase in stock based compensation expense incurred in order to
employ and recruit the proper management team for our China
operations.
Total operating expenses for the fiscal year ended December 31, 2004 increased
by $6,138,605 or 405%, of which $3,129,000 related to stock-based compensation
in 2004 to new officers and key management personnel (of which $1.2 million
related to the retention of Peter Pang as President of our China operations) and
13
$852,580 related to expenses incurred by WinWin Shanghai in our initial year of
China operations. The other operating expenses increased due to increased
payroll expenses and related fringe benefits expenses in the U.S. of
approximately $905,000 in 2004 compared to $246,000 in 2003, for professional
fees expense of $342,000 in 2004; travel, business development and public
relations expenses of approximately $255,000 incurred in 2004; and an overall
increase in other corporate overhead at our new Las Vegas office.
Net sales for the fiscal year ending December 31, 2004 were $13,987 as compared
to $7,415 for the prior year. This represents an 88.63% increase in revenues
compared to last year. We experienced lower than anticipated sales in 2004 due
to the inability of the SWLIC to provide sufficient lottery ticket sales outlets
throughout Shanghai. The failure of SWLIC to provide sufficient lottery
distribution outlets for the sale of Slam Dunk tickets was due primarily to the
fact that new bar code security technology was introduced in connection with the
Slam Dunk game and many of the current distribution outlets did not have the
equipment necessary for this new technology and were unwilling to make the
capital expenditure necessary to acquire such equipment.
During the fiscal year ended December 31, 2004 we recognized extraordinary
income for the resolution and extinguishment of debt incurred by the prior
management of Junum Incorporated, our predecessor. which totaled $598,229.
We had total current assets of $404,924 as of December 31, 2004, of which
$326,750 was cash. Our total assets as of December 31, 2004 were $771,566. We
had total current liabilities of $1,221,549 as of December 31, 2004. Our total
stockholders' deficiency as of December 31, 2004 was $449,983.
We had total deferred tax assets of $4,087,711 of which we have taken a 100%
valuation allowance against the asset, as management believes that it is very
likely that substantially all the deferred tax assets, including our net
operating loss carryforwards will not be realized in future periods. The change
in the valuation allowance, based on a 35% effective tax rate, in 2004 was
$2,460,172.
We used $3,015,119 in cash from our operating activities during the fiscal year
ended December 31, 2004 as compared to $1,112,890 used in the prior year. The
difference of $1,902,229 or a 168% increase is attributable to the expenses
relating to being in the development stage with respect to the establishment of
operations in China, increased overhead expenses in our Las Vegas office and
increases in professional fees and travel and business development expenses.
We used $370,965 in cash from our investing activities during the fiscal year
ended December 31, 2004 as compared to $31,793 used in the prior year. This
increase is due primarily to the purchase of property and equipment of $324,365
in setting up our offices in 2004.
We received $3,362,500 from financing activities during the fiscal year ended
December 31, 2004 as compared to $1,495,017 during the prior year. This increase
is due primarily to an increase in sales of our securities through private
placements in 2004.
Liquidity and Capital Resources
We had $326,750 in cash and cash equivalents as of December 31, 2004. As of such
date, we also had total assets of $771,566. Since inception, we have accumulated
a deficit (net loss) from operations of $11,679,173.
On February 25,2005 we raised $2,000,000 in capital through the private
placement of 4,000,000 shares of our common stock to an accredited investor.
On March 16, 2005, we entered into a revolving line of credit note and agreement
with Art Petrie and a separate revolving line of credit note and agreement with
John Gronvall, each of whom are our directors. Pursuant to each of the revolving
credit arrangements, the lender (either Mr. Petrie or Mr. Gronvall, as
14
applicable) is obligated to loan us up to $500,000 (for an aggregate of
$1,000,000 under both revolving credit facilities) until the loan matures on the
earlier of (a) the first anniversary of the revolving credit arrangement or (b)
the date that we are able to consummate an equity financing transaction in which
we receive gross proceeds of at least $1,000,000. The lender is obligated to
make advances and re-advances under this revolving credit arrangement up to
$500,000 upon demand by us. All amounts outstanding under these arrangements
bear interest at a simple rate of 12% with a default rate of interest at 16%. We
would be in default under the revolving credit arrangements if we fail to make
any payments when due or if a bankruptcy event occurs.
We believe that our currently-available working capital, after receiving the
aggregate proceeds of our capital raising activities in the first quarter of
2005 and the revolving credit arrangements referred to above, should be adequate
to sustain our operations at our current levels through the end of fiscal year
2005, assuming that we only make the investments contemplated by our current
business plan for our Chinese operations.
Our present cash requirements for our China operations are approximately
$900,000 a year or $75,000 per month. Our present cash requirements for our
United States operations are approximately $2,100,000 a year or $175,000 per
month. We will need to arrange additional financing or make other arrangements
in 2005 to fund our United States and China operations. There can be no
assurance that additional financing would be available or, if it is available,
that it would be on acceptable terms.
Our financial statements have been prepared on the basis that we will continue
as a going concern, which contemplates the realization and satisfaction of our
pre existing liabilities and existing liabilities and commitments in the normal
course of business.
Operations to date have been primarily financed by stockholder debt and equity
transactions. As a result, our future operations are dependent upon the
identification and successful completion of permanent equity financing, the
continued support of shareholders and ultimately, the achievement of profitable
operations. Our financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts nor to amounts
and classification of liabilities that may be necessary should we be unable to
continue as a going concern.
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:
o accounting for expenses in connection with stock options and
warrants by using the Black Scholes option pricing method;
o valuation of contingent liabilities, including those from Junum
Incorporated
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.
15
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, 2004 or December 31, 2003.
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. You should carefully
consider the risks and uncertainties described below, which constitute all 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.
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, 2004 are $11,679,173. 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 up to
$325,000 and have established a reserve on our balance sheet in such amount and
we believe such reserve is adequate.
16
WE WILL NEED TO RAISE ADDITIONAL FINANCING IN THE FORESEEABLE FUTURE TO FUND OUR
OPERATION. ADDITIONAL FINANCING MAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS OR
AT ALL.
We will need to raise additional capital in the future to fund continued
operations. We will require additional financing to:
o further develop products, services and technology that we plan to
offer to governmental and charitable customers;
o fund additional marketing expenditures;
o hire additional personnel;
o respond to competitive pressures; and
o 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.
REGULATORY RISKS
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.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL.
We are dependent upon the services of Patrick Rogers, our Chief Executive
Officer, and Peter Pang, our Executive Vice President and General Counsel. The
loss of services of either of these individuals (or other key members of the
management team) could impair our ability to complete the national rollout of
our lottery services in the PRC or to bring our product offering to a
significant level of consumer acceptance.
17
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
COULD IMPACT OUR BUSINESS.
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:
o new laws and regulations or new interpretations of those laws and
regulations;
o the introduction of measures to control inflation or stimulate
growth;
o changes in the rate or method of taxation;
o the imposition of additional restrictions on currency conversion and
remittances abroad; and
o any actions which limit our ability to conduct lottery operations in
China.
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.
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.
UNCERTAINTY RELATING TO CHINA'S LEGAL SYSTEM COULD NEGATIVELY AFFECT US.
China has a civil law legal system. Decided court cases do not have binding
legal effect on future decisions. Since 1979, many new laws and regulations
covering general economic matters have been promulgated in China. Despite this
activity to develop the legal system, China's system of laws is not yet
complete. Even where adequate law exists in China, enforcement of contracts
based on existing law may be uncertain and sporadic and it may be difficult to
obtain swift and equitable enforcement, or to obtain enforcement of a judgment
by a court of another jurisdiction. The relative inexperience of China's
judiciary in many cases creates additional uncertainty as to the outcome of any
litigation. Further, interpretation of statutes and regulations may be subject
to government policies reflecting domestic political changes.
18
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,
2004 and 2003, and the reports thereon of Asher and Company, Ltd. and
Livingston, Wachtell & Co., LLP respectively, are included in this annual
report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 4, 2004, we formally dismissed Livingston, Wachtell & Co., LLP
("LWC") as our independent registered public accounting firm. Such dismissal was
approved by our board of directors.
LWC's reports on our financial statements for either of the past two recent
fiscal years did not contain an adverse opinion, disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles; except that LWC's reports did contain qualifications as to our
ability to continue as a going concern.
There were no disagreements with LWC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of LWC, would have caused it
to make reference to the subject matter of the disagreements in connection with
this report. No reportable events of the type described in item 304(a)(1)(iv)(B)
of Regulation S-B occurred during the two most recent fiscal years.
We provided LWC with a copy of this disclosure and requested that they furnish
the Company with a letter addressed to the Commission stating whether LWC agrees
or disagrees with the statements by us in a Current Report on Form 8-K and, if
19
not, stating the respects in which it does not agree. A letter from LWC to such
effect is attached as Exhibit 16.1 to our current report on Form 8-K filed with
the Securities and Exchange Commission on October 7, 2004.
Also effective October 4, 2004, Asher & Company, Ltd. was appointed as the new
independent registered public accounting firm for the Company.
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.
ITEM 8A. CONTROLS AND PROCEDURES.
Within 90 days of the filing of this Form 10-KSB, 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, of 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 significant changes in our internal controls or in other factors
that could significantly affect these internal controls subsequent to the date
of our most recent evaluation.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Our directors and officers as of December 31, 2004, are:
Name Age Position
---- --- --------
Patrick O. Rogers 47 Chairman, CEO and President
Arthur J. Petrie 70 Director
Dwight V. Call 70 Director
Peter Pang 52 Director, Executive Vice President and
Genl. Council
John Gronvall 47 Director
Monica Soares 35 Corporate Secretary
Larry Goldman 48 CFO/Treasurer and Vice President
of Finance
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 WinWin, Inc., a Nevada corporation
acquired by us on March 31, 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.
20
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'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 MC 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 full Professor 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.
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.
MR. JOHN GRONVALL became 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 Win Win and is active in all aspects of the day-to-day operations.
Monica Soares and Patrick Rogers are married to each other.
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 19 years. 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.
21
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.
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.
22
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 $100,000 and was serving at the end of our last fiscal year December 31,
2004, for services in all capacities to us.
[Enlarge/Download Table]
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- ------------
AWARDS PAYOUTS
---------------------- -------------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
COMP- STOCK OPTIONS/ LTIP COMPEN-
NAME AND YEAR SALARY BONUS ENSATION AWARDS SARS PAYOUTS SATION
PRINCIPAL POSITION ($) ($) ($) ($) (#) ($) ($)
Patrick O. Rogers 2004 180,000 0 0 225,000 900,000 0 0
Chairman, CEO and 2003 150,000 30,000 0 0 0 0 0
President(1) 2002 0 0 0 0 0 0 0
Peter Pang 2004 151,024 0 0 1,200,000(2) 800,000 0 0
Executive Vice 2003 60,618(2) 0 0 0 0 0 0
President and General 2002 0 0 0 0 0 0 0
Counsel
Larry Goldman 2004 65,993(3) 0 0 90,000 750,000 0 0
Chief Financial 2003 0 0 0 0 0 0 0
Officer/VP Finance 2002 0 0 0 0 0 0 0
Monica Soares 2004 47,500 79,000(5) 0 0 300,000 0 0
Senior VP 2003 66,000(4) 0 0 0 0 0 0
Administration 2002 0 0 0 0 0 0 0
-----------------------------
(1) Patrick Rogers became our Chairman, Chief Executive Officer and President
on December 5, 2003. Prior to that he was our President. Mr. Rogers is
also the Chairman of the board of directors.
(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 & 2003 and to allow the company to employ Mr.
Pang.
(3) This amount consists of fees paid to an entity affiliated with Mr. Goldman
for services provided by such firm and entity during the fiscal year 2004.
(4) This amount consists of fees paid to an entity affiliated with Ms. Soares
for services provided by such firm and entity during the fiscal year 2003.
(5) This amount was accrued at December 31, 2004 and remains unpaid.
23
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the grant of stock options made during the year
ended December 31, 2004 to the persons named in the Summary Compensation Table:
[Enlarge/Download Table]
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO EMPLOYEES EXERCISE
NAME OPTIONS GRANTED IN FISCAL PERIOD(C) PRICE PER SHARE EXPIRATION DATE(D)
---- -------------------- -------------------- --------------- ------------------
Patrick O. Rogers 900,000 29.51% $0.45 12/30/09
Monica Soares 300,000 9.84% $0.45 12/30/09
Peter Pang 800,000 26.23% $0.45 12/30/09
Larry Goldman 750,000 24.59% $0.45 12/30/09
The following table sets forth information with respect to unexercised stock
options held by the persons named in the Summary Compensation Table at December
31, 2004. No stock options were exercised in 2004 by those persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
[Download Table]
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL
OPTIONS AT FISCAL YEAR-END # YEAR-END($)
---------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Patrick O. Rogers 900,000 0 $405,000 0
Monica Soares 300,000 0 $135,000 0
Peter Pang 800,000 0 $360,000 0
Larry Goldman 750,000 0 $337,500 0
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. On December 29,2004 30,000 additional non-qualified stock options were
granted to each director for additional time spent on various corporate matters
during 2004.
24
EMPLOYMENT AGREEMENTS
We have not entered into formal employment agreements with any of our executive
officers.
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.
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, 2004, 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 29, 2004. Forms 5 were
subsequently filed disclosing the option grants.
Patrick O. Rogers
Arthur J. Petrie
Dwight V. Call
Peter Pang
John Gronvall
Larry Goldman
Monica Soares
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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, 2004.
[Download Table]
Name of Shareholder Number of Shares Percentage of Class
Patrick O. Rogers 10,200,000 (1) 23.94%
8687 W. Sahara Suite 201
Las Vegas, Nevada 89117-5869
Peter Pang 2,379,347 (2) 5.63%
8687 W. Sahara Suite 201
Las Vegas, Nevada 89117-5869
Dwight V. Call 472,000 (3) 1.13%
8687 W. Sahara Suite 201
Las Vegas, Nevada 89117-5869
25
Art Petrie 6,019,506 (4) 14.18%
8687 W. Sahara Suite 201
Las Vegas, Nevada 89117-5869
John Gronvall 4,388,600 (5) 10.51%
8687 W. Sahara Suite 201
Las Vegas, Nevada 89117-5869
Larry Goldman 850,000 (6) 2.02%
8687 W. Sahara Suite 201
Las Vegas, Nevada 89117-5869
Monica Soares 10,200,000 (7) 23.94%
8687 W. Sahara Suite 201
Las Vegas, Nevada 89117-5869
Directors and officers as a group (7 24,309,453 (1) - (7) 52.84%
persons)
-------------------------------------------------------------------------------
(1) 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; and 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
December 30, 2004. 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.
(2) Consists of 21,650 shares held by Mr. Pang indirectly through IPO Pang
P.C.; 1,507,697 shares held by Mr. Pang indirectly through Landward
International, Ltd.; 50,000 warrants to purchase common stock at an
exercise price of $0.50; and 800,000 options to purchase common stock at
an exercise price of $0.45, which vested as of December 30, 2004. .
(3) Consists of 72,000 shares held by Mr. Call directly; 250,000 warrants to
purchase common stock at an exercise price of $0.50; 55,000 options to
purchase common stock at an exercise price of $0.50, which vested as of
February 12, 2004; and 45,000 options to purchase common stock at an
exercise price of $0.45, which vested as of December 30, 2004; and 50,000
options to purchase common stock at an exercise price of $0.50, which
vested as of December 31, 2004, and are held by Christine Call (Mr. Call's
wife).
(4) Consists of 4,687,278 shares held by Mr. Petrie directly; 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 December 30, 2004; 56,000 shares held
indirectly through Gaming Guaranty, LLC.; 67,000 shares held by a broker;
156,000 shares held indirectly through Players Club Partners, LLC; and
953,228 warrants, of which 753,228 are held by Mr. Petrie to purchase
common stock at an exercise price of $0.50; 50,000 warrants to purchase
common stock at an exercise price of $0.50 are held by Gaming Guaranty,
LLC; 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; 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; and 70,000 options to purchase common stock at an exercise
price of $0.45, which vested as of December 30, 2004.
26
(6) Consists of 100,000 shares held by Mr. Goldman directly; and 750,000
options to purchase common stock at an exercise price of $0.45, which
vested as of December 30, 2004.
(7) Consists of the 10,200,000 shares held directly or indirectly by Ms.
Soares' husband, Patrick Rogers. See Note (1) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the 2004 and 2003 fiscal years, we were provided services from a law firm
affiliated with Peter Pang, our director, Executive Vice President and General
Counsel. We paid such firm fees in the aggregate amount of $31,738 in 2004 and
$60,618 in 2003.
Effective December 31, 2002, we acquired 100% of the capital stock of Win Win,
Inc., a Nevada corporation, that was then wholly-owned by Patrick Rogers, our
Chairman, Chief Executive Officer and President and Benjamin Perry, a former
executive officer and director, respectively, for consideration of 23,722,853
shares of common stock, plus a $5,000,000 senior secured debenture, secured by
100% of the stock of Win Win, Inc. and 100% of the stock of Win Win Acquisition
Corp. our wholly-owned subsidiary that directly owns the stock of Win Win, Inc.
The debenture provided that in the event of certain events of default, the
holder of the debenture would have the right to foreclose on the stock of WinWin
Acquisition Corp. and WinWin, Inc. This included any delisting of our common
stock from the NASD OTC Bulletin Board. Our stock was, in fact, delisted, and
the holders of the debenture, Patrick Rogers and Benjamin Perry, granted us
until February 15, 2003 to cure the default or rescind the transaction. We were
unable to cure the default, and the entire transaction was rescinded, and null
and void, effective as of December 31, 2002. We were subsequently able to have
our common stock relisted on the NASD OTC Bulletin Board, and were able to
renegotiate the acquisition of WinWin, Inc. with Mr. Perry and Mr. Rogers on
substantially similar terms and conditions as the original agreement, except
that the total number of shares of our common stock issued for the acquisitions
was reduced from 22,512,000 to 18,522,853. This transaction closed as of March
31, 2003. The debenture issued to Mr. Rogers and Mr. Perry in connection with
the acquisition of Win Win, Inc. was converted in accordance with its terms on
March 16, 2004 into 100,000 shares of our common stock, in the aggregate.
On April 1, 2004, Arthur Petrie, one of our directors, forgave $176,614 of
principal and accrued interest under a debenture in exchange for 353,228 shares
of our common stock and three-year warrants to purchase 353,228 shares of our
common stock at an exercise price equal to $0.50 per share.
On March 16, 2005, we entered into a revolving line of credit note and agreement
with Art Petrie and a separate revolving line of credit note and agreement with
John Gronvall, each of whom are our directors. Pursuant to each of the revolving
credit arrangements, the lender (either Mr. Petrie or Mr. Gronvall, as
applicable) is obligated to loan us up to $500,000 (for an aggregate of
$1,000,000 under both revolving credit facilities) until the loan matures on the
earlier of (a) the first anniversary of the revolving credit arrangement or (b)
the date that we are able to consummate an equity financing transaction in which
we receive gross proceeds of at least $1,000,000. The lender is obligated to
make advances and re-advances under this revolving credit arrangement up to
$500,000 upon demand by us. All amounts outstanding under these arrangements
bear interest at a simple rate of 12% with a default rate of interest at 16%. We
would be in default under the revolving credit arrangement if we fail to make
any payments when due or if a bankruptcy event occurs.
27
ITEM 13. EXHIBITS
------- ----------------------------------------------------------------------
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- ----------------------------------------------------------------------
*3.1 Certificate of Incorporation of the Company filed December 30, 1999,
is incorporated herein by reference from the Company's (SEC File No.
33-57998-D) Form SB-2 registration statement filed April 29, 1993.
------- ----------------------------------------------------------------------
*3.2 Amended and Restated Bylaws of the Company are incorporated herein by
reference to the Company's Current Report on Form 8-K, dated December
15, 2003, Exhibit 3.1.
------- ----------------------------------------------------------------------
*3.3 Certificate of Amendment of Certificate of Incorporation of the
Company is incorporated herein by reference from the Company's (SEC
File No. 33-57998-D) Form SB-2 registration statement filed April 29,
1993, Item 27.
------- ----------------------------------------------------------------------
*3.4 Amendment to Certificate of Incorporation filed February 2, 1995, is
incorporated herein by reference from the Company's (SEC File No.
0-21566) Form 10-KSB annual report for the year ended December
31,1994, Item 6, Exhibit 3.01.
------- ----------------------------------------------------------------------
*3.5 Certificate of Amendment of Certificate of Incorporation of the
Company filed June 26, 1996, is incorporated hereby reference from the
Company's (SEC File No. 0-21566) annual report on Form 10-KSB for the
year ended June 30, 1996, Part IV, Item 14(c), Exhibit 4.06.
------- ----------------------------------------------------------------------
*3.6 Certificate of Amendment of Certificate of Incorporation of October 3,
2000, is incorporated hereby by reference to Exhibit 4.07 to the Form
10-KSB of the Company (Eurbid.com) for its fiscal year ended June 30,
2000.
------- ----------------------------------------------------------------------
*3.7 Certificate of Amendment of Certificate of Incorporation of December
31, 2002 is incorporated hereby reference to Exhibit 1 to the Form 8-K
current report of the Company for December 31, 2002.
------- ----------------------------------------------------------------------
*3.8 Certificate of Amendment of Certificate of Incorporation, filed with
the Secretary of State of the State of Delaware on December 8, 2004,
is incorporated by reference to Appendix B to the definitive
information statement on Schedule 14C of the Company filed on November
10, 2004.
------- ----------------------------------------------------------------------
*10.1 Stock Exchange Agreement dated December 31, 2002, regarding the
acquisition of WinWin, Inc. by the Company is incorporated by
reference to Exhibit 10.1 to the Form 8-K current report of the
Company for December 31, 2002.
------- ----------------------------------------------------------------------
*10.2 Amended and Restated Stock Exchange Agreement dated March 31, 2003, is
incorporated by reference to Exhibit 10.1 to the Form 8-K current
report of the Company dated March 31, 2003.
------- ----------------------------------------------------------------------
*10.3 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.
------- ----------------------------------------------------------------------
*10.4 Agreement, dated October 8, 2003, between WinWin, Inc. and Sande
Stewart Television, Inc. is incorporated by reference to Exhibit 10 to
the 10-QSB quarterly report of the Company for the quarter ended
September 30, 2003.
------- ----------------------------------------------------------------------
28
------- ----------------------------------------------------------------------
*10.5 Cooperation Agreement, dated December 15, 2003, between WinWin
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.
------- ----------------------------------------------------------------------
*10.6 TV Cooperation Agreement, dated December 15, 2003, between WinWin
Consulting (Shanghai) Co. Ltd. and Shanghai Welfare Lottery Issuing
Center is incorporated by reference to Exhibit 10.2 to the Form 8-K
current report of the Company filed on January 2, 2004.
------- ----------------------------------------------------------------------
*10.7 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.
------- ----------------------------------------------------------------------
*10.8 Form of Warrant used for private placements is incorporated by
reference to Exhibit 10.29 to the Annual report on Form 10-KSB of the
Company for the fiscal year ended December 31, 2003.
------- ----------------------------------------------------------------------
*10.9 WinWin Gaming Inc. 2003 Stock Plan is incorporated by reference to
Exhibit 10.30 to the Annual report on Form 10-KSB of the Company for
the fiscal year ended December 31, 2003.
------- ----------------------------------------------------------------------
*10.10 Form of WinWin Gaming Inc. Stock Option Agreement under 2003 Stock
Plan is incorporated by reference to Exhibit 10.31 to the Annual
report on Form 10-KSB of the Company for the fiscal year ended
December 31, 2003.
------- ----------------------------------------------------------------------
*10.11 Form of WinWin Gaming Inc. Restricted Stock Grant Agreement under 2003
Stock Plan is incorporated by reference to Exhibit 10.32 to the Annual
report on Form 10-KSB of the Company for the fiscal year ended
December 31, 2003.
------- ----------------------------------------------------------------------
*10.12 Project Cooperation Agreement, dated April 30, 2004, between WinWin
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.
------- ----------------------------------------------------------------------
*10.13 Securities Purchase Agreement, dated February 25, 2005, among the
Company and the investors who are parties thereto is incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K,
filed on February 28, 2005.
------- ----------------------------------------------------------------------
*10.14 Registration Rights Agreement, dated February 25, 2005, among the
Company and the investors who are parties thereto is incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K,
filed on February 28, 2005.
------- ----------------------------------------------------------------------
10.15 Revolving Credit Note and Agreement, dated March 16, 2005, between the
Company and Art Petrie.
------- ----------------------------------------------------------------------
10.16 Revolving Credit Note and Agreement, dated March 16, 2005, between the
Company and John Gronvall.
------- ----------------------------------------------------------------------
*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.
------- ----------------------------------------------------------------------
*14 Code of Ethics is incorporated by reference to Exhibit 14 to the
Annual report on Form 10-KSB of the Company for the fiscal year ended
December 31, 2003.
------- ----------------------------------------------------------------------
29
------- ----------------------------------------------------------------------
21. A description of the subsidiaries of the Company
------- ----------------------------------------------------------------------
23.1 Consent of Asher & Company, Ltd.
------- ----------------------------------------------------------------------
23.2 Consent of Livingston, Wachtell & Co., LLP
------- ----------------------------------------------------------------------
31.1 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
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
The aggregate fees billed for each of the fiscal year ended December 31, 2004
and 2003 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 $48,235 and $50,000, respectively.
AUDIT-RELATED FEES
The aggregate fees billed in the fiscal year ended December 31, 2004 and 2003
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, 2004 and 2003
for professional services rendered by the principal accountant for tax
compliance, tax advice and tax planning were $0 and $0, respectively.
ALL OTHER FEES
The aggregate fees billed in the fiscal years ended December 31, 2004 and 2003
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 October 4, 2004, 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, 2004 and the quarterly reviews for the subsequent fiscal quarters
of 2005 through the review for the quarter ended September 30, 2005, at which
30
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-).
31
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.
Date: March 21, 2005
WinWin Gaming, Inc.
By: /s/ Patrick O. Rogers
----------------------------------------------
Patrick O. Rogers
Chairman, Chief Executive Officer and
President
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.
[Enlarge/Download Table]
Signature Title Date
--------- ----- ----
/s/ Patrick O. Rogers Chairman, CEO and President March 21, 2005
-------------------------------------
Patrick O. Rogers
/s/ Larry Goldman CFO/VP Finance and Treasurer March 21, 2005
-------------------------------------
Larry Goldman
/s/ John Gronvall Director March 21, 2005
-------------------------------------
John Gronvall
/s/ Arthur Petrie Director March 21, 2005
-------------------------------------
Arthur Petrie
/s/ Dwight V. Call Director March 21, 2005
-------------------------------------
Dwight V. Call
/s/ Peter Pang Executive Vice President, General March 21, 2005
------------------------------------- Counsel and Director
Peter Pang
32
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 2004
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM - ASHER & COMPANY, LTD. F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM - LIVINGSTON WATCHELL & COMPANY LLP F-3
CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEET F-4
STATEMENTS OF OPERATIONS F-5
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY F-6
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) as of December 31,
2004 and the related consolidated statements of operations, stockholders'
deficiency and cash flows for the year then ended and for the period from May
10, 2002 (inception) to December 31, 2004. 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 audit.
We conducted our audit 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes 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,
2004 and the results of their operations and their cash flows for the year then
ended, and for the period from May 10, 2002 (inception) to December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Asher & Company, Ltd.
Philadelphia, Pennsylvania
February 28, 2005 (March 16, 2005 as to Note 12)
F-2
Board of Directors
WinWin Gaming, Inc.
(Formerly Junum Incorporated)
Las Vegas, NV
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of WinWin Gaming,
Inc. (formerly Junum Incorporated), and subsidiaries (a development stage
company) as of December 31, 2003, and the related consolidated statements of
operations, stockholders' deficiency and cash flows for the year then ended and
from May 10, 2002 (Inception) to December 31, 2003. 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 audit.
We conducted our audit 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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.
(formerly Junum Incorporated) and subsidiaries (a development stage company) as
of December 31, 2003, and the results of their operations and their cash flows
for the year then ended and for the period from May 10, 2002 (Inception) to
December 31, 2003, 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. Also, as described in notes 2
and 7, the accompanying consolidated financial statements can be materially
affected by significant estimates, specifically those estimates which represent
management's expectations pertaining to certain liabilities that existed in
Junum Incorporated ("predecessor company") prior to March 31, 2003, the date of
the reverse acquisition. The ultimate disposition of these liabilities and the
preacquisition contingent liabilities of the predecessor company could prove to
be significantly more or less than the amounts shown in the accompanying
consolidated balance sheet. Also, as discussed in note 2 to the consolidated
financial statements, the Company has no established source of revenue, has a
working capital deficit and has suffered recurring losses from operations. Its
difficulty in generating sufficient cash flow from operations to meet its
obligations and sustain its operations, and management's estimates regarding the
amount of pre-existing liabilities of the predecessor company raises substantial
doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
/s/ Livingston Wachtell & Co., LLP
New York, New York
April 1, 2004
F-3
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
Assets
Current assets:
Cash and cash equivalents $ 326,750
Accounts receivable 2,982
Prepaid expenses 33,250
Rental deposits 24,454
Other current assets 17,488
------------
Total current assets 404,924
Property and equipment, net 320,042
Intangible assets, net 39,158
Other assets 7,442
------------
Total assets $ 771,566
============
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable $ 367,346
Accrued legal expenses 325,097
Accrued expenses 97,606
Due to officers - accrued compensation 394,000
Note payable 37,500
------------
Total current liabilities 1,221,549
Commitments and contingencies - See Note 10
Stockholders' deficiency:
Preferred stock, issuable in series,
$.01 par value, 10,000,000 authorized
shares, none issued --
Common stock, $0.01 par value,
300,000,000 authorized shares;
41,411,607 issued and outstanding 414,116
Additional paid-in capital 10,815,074
Accumulated deficit from operations (11,679,173)
------------
Total stockholders' deficiency (449,983)
------------
Total liabilities and stockholders' deficiency $ 771,566
============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 2004
[Enlarge/Download Table]
CUMULATIVE
AMOUNTS SINCE
MAY 10, 2002 (INCEPTION)
TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------------------- ------------
2004 2003 2004
------------ ------------ ------------
Revenues $ 13,987 $ 7,415 $ 21,402
Selling, general and
administrative expenses 3,193,237 933,353 4,599,055
Stock based compensation expense 4,460,016 581,295 6,192,811
------------ ------------ ------------
Total operating expenses 7,653,253 1,514,648 10,791,866
------------ ------------ ------------
Operating loss (7,639,266) (1,507,233) (10,770,464)
Other income (expenses)
Reorganization expense -- (1,059,372) (1,059,372)
Currency translation gain 5,297 -- 5,297
Interest income 11,304 -- 11,304
Interest expense (4,627) (449,737) (464,167)
------------ ------------ ------------
Total other income (expenses) 11,974 (1,509,109) (1,506,938)
------------ ------------ ------------
Loss before extraordinary item (7,627,292) (3,016,342) (12,277,402)
Extraordinary income:
Extinguishment of debt 598,229 -- 598,229
------------ ------------ ------------
Net loss $ (7,029,063) $ (3,016,342) $(11,679,173)
============ ============ ============
Basic and diluted net loss per share
Loss before extraordinary item $ (.20) $ (.13)
Extraordinary item .02 --
------------ ------------
Net loss $ (.18) $ (.13)
============ ============
Weighted average number of
common shares outstanding 38,058,967 23,749,482
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FROM INCEPTION MAY 10, 2002 TO DECEMBER 31, 2004
[Enlarge/Download Table]
ADDITIONAL ACCUMULATED
COMMON STOCK PAID-IN DEFICIT FROM
SHARES AMOUNT CAPITAL OPERATIONS
------------ ------------ ------------ ------------
Balance at May 10, 2002, inception -- $ -- $ -- $ --
Stock issued for cash 18,000,000 1,000 -- --
Warrants issued for services -- -- 1,151,500 --
Net loss for the period -- -- -- (1,633,768)
------------ ------------ ------------ ------------
Balance at December 31, 2002 18,000,000 1,000 1,151,500 --
Debenture issued to stockholders -- -- -- --
Recapitalization as a result of
reverse merger 5,225,107 231,251 (231,251) --
Stock issued for cash 1,353,263 13,532 878,871 --
Stock subscription 7,667 77 4,523 --
Conversion of debt to equity 1,087,000 10,870 364,130 --
Conversion of accrued interest
to equity 76,092 761 37,285 --
Stock issued for services 79,347 793 123,302 --
Warrants issued for services -- -- 457,200 --
Exercise of warrants 25,000 250 12,250 --
Cashless exercise of warrants
for stock 4,042,647 40,427 (40,427) --
Net loss -- -- -- (3,016,342)
------------ ------------ ------------ ------------
Balance at December 31, 2003 29,896,123 $ 298,961 $ 2,757,383 $(4,650,110)
Debenture converted by stockholders 100,000 1,000 417,313 --
Collection of subscription receivable -- -- -- --
Stock issued for cash 9,280,000 92,800 3,257,600 --
Conversion of payables to equity 428,506 4,285 244,832 --
Stock issued for services 1,681,978 16,820 1,541,896 --
Exercise of stock options 25,000 250 9,750 --
Issuance of compensatory stock options -- -- 1,614,000 --
Warrants issued to consultants -- -- 972,300 --
Net loss -- -- -- (7,029,063)
------------ ------------ ------------ ------------
Balance at December 31, 2004 41,411,607 $ 414,116 $ 10,815,074 $(11,679,173)
============ ============ ============ ============
OTHER CAPITAL
DEFICIT SUBSCRIPTION
ACCOUNT RECEIVABLE TOTAL
------------ ------------ ------------
Balance at May 10, 2002, inception $ -- $ -- $ --
Stock issued for cash -- -- 1,000
Warrants issued for services -- -- 1,151,500
Net loss for the period -- -- (1,633,768)
------------ ------------ ------------
Balance at December 31, 2002 -- -- (481,268)
Debenture issued to stockholders (5,000,000) -- (5,000,000)
Recapitalization as a result of
reverse merger -- -- --
Stock issued for cash -- -- 892,403
Stock subscription -- (4,600) --
Conversion of debt to equity -- -- 375,000
Conversion of accrued interest
to equity -- -- 38,046
Stock issued for services -- -- 124,095
Warrants issued for services -- -- 457,200
Exercise of warrants -- -- 12,500
Cashless exercise of warrants
for stock -- -- --
Net loss -- -- (3,016,342)
------------ ------------ ------------
Balance at December 31, 2003 $ (5,000,000) $ (4,600) $(6,598,366)
Debenture converted by stockholders 5,000,000 -- 5,418,313
Collection of subscription receivable -- 4,600 4,600
Stock issued for cash -- -- 3,350,400
Conversion of payables to equity -- -- 249,117
Stock issued for services -- -- 1,558,716
Exercise of stock options -- -- 10,000
Issuance of compensatory stock options -- -- 1,614,000
Warrants issued to consultants -- -- 972,300
Net loss -- -- (7,029,063)
------------ ------------ ------------
Balance at December 31, 2004 $ -- $ -- $ (449,983)
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 2004
[Enlarge/Download Table]
Cumulative Amounts
Year Ended Year Ended Since May 10, 2002
December 31, December 31, (Inception) to
2004 2003 December 31, 2004
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (7,029,063) $ (3,016,342) $(11,679,173)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 37,438 4,704 42,142
Reorganization expense -- 1,059,372 1,059,372
Stock based compensation expense 4,460,016 581,295 6,192,811
Changes in operating assets and liabilities:
Accounts receivable (2,982) 3,791 (5,666)
Rental deposits (24,454) -- (24,454)
Ticket supplies 29,232 (29,232) --
Prepaid expenses (31,566) -- (31,566)
Other current assets (17,488) (17,488)
Accounts payable 234,804 (27,064) 241,877
Accrued expenses (328,186) 310,586 (7,968)
Accrued interest (342,870) -- (342,870)
------------ ------------ ------------
Net cash used in operating activities (3,015,119) (1,112,890) (4,572,983)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (324,365) (31,793) (362,184)
Other (46,600) -- (46,600)
------------ ------------ ------------
Net cash used in investing activities (370,965) (31,793) (408,784)
------------ ------------ ------------
Cash flows from financing activities:
Notes payable, net (2,500) 375,000 822,500
Debentures issued -- 214,114 214,114
Stock issued for cash 3,350,400 892,403 4,243,803
Proceeds from the exercise of stock warrants 10,000 12,500 22,500
Proceeds from stock subscription receivable 4,600 1,000 5,600
------------ ------------ ------------
Net cash provided by financing activities 3,362,500 1,495,017 5,308,517
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (23,584) 350,334 326,750
Cash and cash equivalents - beginning of year 350,334 -- --
------------ ------------ ------------
Cash and cash equivalents - end of year $ 326,750 $ 350,334 $ 326,750
============ ============ ============
Supplemental disclosures of noncash
investing and financing activities: $ 5,667,430 $ 413,046 $ 6,080,476
============ ============ ============
Conversion of the debt to equity
Cashless exercise of warrants for stock $ -- $ 40,427 $ 40,427
============ ============ ============
Stock subscription receivable $ -- $ 4,600 $ 4,600
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. ORGANIZATION AND NATURE OF OPERATIONS, AND ACQUISITION
WinWin Gaming, Inc.
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. The Company, while operating under the
name Junum Incorporated, was a technology-based financial services company
specializing in providing credit management and related services to
consumers and small business. 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.
Win Win, Inc.
Win Win, Inc., a Nevada corporation, (the "Operating Subsidiary") was
incorporated May 10, 2002. The Operating Subsidiary is an international
lottery and gaming company. The Operating Subsidiary offers a complete
"turn-key" service providing funding, equipment, training, management, and
marketing for lottery and gaming operations worldwide. The Company, for
the years ended December 31, 2004 and 2003, derived all of its revenue
providing consulting services to foreign governments by assisting them in
running their welfare lotteries.
Win Win Consulting (Shanghai) Co. Ltd.
Win Win Consulting (Shanghai) Co. Ltd. ("Win Win Shanghai"), a corporation
organized in the Peoples Republic of China ("PRC") on November 28, 2003,
is a wholly-owned foreign subsidiary of the Operating Subsidiary
conducting all of the business in the PRC.
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 18,522,853 shares of
the Company's common stock. This transaction was effected to facilitate
the acquisition of 100% of the Operating Subsidiary.
F-8
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. ORGANIZATION AND NATURE OF OPERATIONS, AND ACQUISITION (Continued)
Acquisition
On March 31, 2003 (the "Acquisition Date") the Company and Acquisition
Corp. entered into a stock exchange agreement with the Operating
Subsidiary. Pursuant to the stock exchange agreement, the Operating
Subsidiary became a wholly-owned subsidiary of Acquisition Corp. and an
indirect wholly-owned subsidiary of the Company. The acquisition was
effected under the stock exchange agreement when the stockholders of
Operating Subsidiary exchanged all of the outstanding capital stock of
Operating Subsidiary for 18,522,853 shares of the Company's common stock
that was then held by Acquisition Corp. The Company's existing preferred
stockholders converted 1,350,000 shares of preferred stock for 5,200,000
shares of common stock on the Acquisition Date. There were 25,107 shares
of the Company's common stock outstanding and held by other stockholders
on the Acquisition Date.
Since the Company had no significant activities at the Acquisition Date
and the former stockholders of the Operating Subsidiary owned a majority
of the issued and outstanding shares of common stock of the Company after
the acquisition, this transaction was accounted for as a recapitalization
of the Operating Subsidiary, whereby the Operating Subsidiary is deemed to
be the accounting acquirer and has adopted the capital structure of the
Company.
In addition to receiving 18,522,853 shares of the Company's common stock
in connection with the acquisition, the former stockholders and current
officers of the Operating Subsidiary also received a $5 million senior
secured debenture (the "Debenture"). The Debenture was due on December 31,
2007, and bore interest at 10% per annum. The Debenture was convertible
into Common Stock at the rate of 100% of the average closing price of the
Company's common stock for the 20 trading days prior to the conversion,
but in no event to exceed 100,000 shares. A holder of the Debenture must
give the Company at least 90 days prior notice of conversion. The due date
of the Debenture could have been accelerated upon an Event of Default.
On March 19, 2004, the Debenture was converted into 100,000 shares of the
Company's common stock.
F-9
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. ORGANIZATION AND NATURE OF OPERATIONS, AND ACQUISITION (Continued)
Acquisition Continued)
The equity reduction resulting from the issuance of the $5 million
debenture liability incurred to the former stockholders of the Operating
Subsidiary that was the result of the acquisition, was reported in the
stockholders' deficiency section of the balance sheet, under the caption
"Other capital deficit account", at December 31, 2003.
The assets and liabilities of the Company were deemed to have been
acquired by the Operating Subsidiary on the Acquisition Date. All
financial information included in this report on Form 10-KSB that is as of
a time prior to the Acquisition Date is the financial information of the
Operating Subsidiary on a stand-alone basis, as if the Operating
Subsidiary had been the registrant required to file this report. The
financial information from and after the Acquisition Date is that of the
Company, the Operating Subsidiary, Acquisition Corp., and Win Win
Consulting, on a consolidated basis.
Due to the recapitalization of the Operating Subsidiary, all reference to
shares of the Operating Subsidiary's common stock have been restated to
reflect the equivalent number of shares of the Company's common stock
outstanding at the Acquisition Date. In other words, the shares of the
Operating Subsidiary's outstanding common stock at March 31, 2003 were
restated as 18,522,853 shares outstanding of the Company, as shown on the
statement of stockholders' deficiency, "recapitalization as a result of
the reverse merger" at March 31, 2003. References to the number of
Operating Subsidiary shares in earlier share transactions of the Operating
Subsidiary reflect the number of Company shares into which they were
converted at the Acquisition Date.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the
Operating Subsidiary and its subsidiaries, prior to the Acquisition Date
and the Company and all its subsidiaries after the Acquisition Date. All
material intercompany accounts and transactions have been eliminated in
consolidation.
F-10
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Principles of Consolidation and Basis of Presentation (Continued)
The Operating Subsidiary formed a new subsidiary on March 17, 2003 called
Lucky Win Win Cambodia, Inc. (the "Cambodian Subsidiary") and began
lottery operations in Cambodia on May 15, 2003. The Company entered into a
Management Services Agreement, dated May 12, 2003, with Golden Win Win
Cambodia, Inc. ("Golden Win Win"), a Company owned and exclusively
controlled by a former director (the "director") of the Company. Golden
Win Win and the director hold a renewable and non-transferable license
granted by the Kingdom of Cambodia to conduct lotteries and lotto in
Cambodia for an initial term of three years, expiring in August 2005.
All of the Company's revenues in 2003 were derived from Cambodian
lotteries. The income from these operations is subject to governmental
regulation and reports, and to payments to the National Treasury of
Cambodia. The Company's involvement in the Cambodian lottery was
discontinued in 2004, when the Company decided to conduct its current
lottery operations in the PRC.
The net loss from foreign operations was $837,337 for the year ended
December 31, 2004. Total assets and net assets in Win Win Shanghai at
December 31, 2004 were $114,212 and $93,151, respectively. The Company's
total investment in Win Win Shanghai at December 31, 2004 was $940,000.
Capital Resources And Business Risks Issues
The Company's future operations are subject to all of the risks inherent
in the establishment of a new business enterprise. At December 31, 2004,
current liabilities exceeded current assets by $816,625.
As discussed in Note 12, in February 2005, the Company sold shares of its
common stock for $2 million. Also, as discussed in Note 12, in March 2005,
the Company secured lines of credit from two stockholders and directors in
the aggregate amount of $1 million.
F-11
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capital Resources And Business Risks Issues (Continued)
We believe that our currently available working capital, after receiving
the aggregate proceeds of our capital raising activities in the first
quarter of 2005 and the revolving credit arrangements referred to above,
should be adequate to sustain our operations at our current levels through
the end of fiscal year 2005 assuming that we only make the investments
contemplated by our current business plan for our Chinese operations.
Our present cash requirements for our China operations are approximately
$900,000 a year or $75,000 per month. Our present cash requirements for
our United States operations are approximately $2,100,000 a year or
$175,000 per month. We will need to arrange additional financing or make
other arrangements in 2005 to fund our United States and China operations.
There can be no assurance that additional financing would be available or,
if it is available, that it would be on acceptable terms.
Operations to date have been primarily financed by stockholder debt and
equity transactions. As a result, our future operations are dependent upon
the identification and successful completion of permanent equity
financing, the continued support of shareholders and ultimately, the
achievement of profitable operations.
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, 2004 was $81,448,
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 December 31, 2004.
F-12
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Translation
The functional currency for Win Win Shanghai is the Yuan, Renminbi. 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 Yuan in 2004 and 2003, and for the cumulative period from
May 10, 2002 to December 31, 2004, there were no significant translation
adjustments.
Comprehensive Income (Loss)
The Company, under SFAS No. 130, is 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 2004 and 2003
and for the cumulative period from May 10, 2002 to December 31, 2004.
Control by Principal Stockholders
The directors, executive officers and their affiliates or related parties,
own beneficially and in the aggregate, the majority 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, 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 assets
or business.
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. The more significant areas
requiring the use of management estimates related to valuation of
contingent liabilities, stock warrants, and options issued and
outstanding. The Company accrues all estimated legal costs relating to
contingencies.
F-13
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Extinguishment of Debt of Preacquisiton Liabilities From Junum -
Extraordinary Income
In 2003, 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 the Operating Subsidiary in the
reverse acquisition, valuation of payroll tax and other contingent
liabilities, 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 the Operating Company, 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
FASB Statement 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 have been resolved during the year ended December 31, 2004 and
the remaining liabilities at December 31, 2004 are recorded under the
caption "Accrued legal expenses" 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 $325,000 at December 31, 2004, of which
$300,000 has been recorded as a contingent liability for fees regarding a
pending legal proceeding and $25,000 to a convertible debenture holder of
Junum. The Company is currently defending itself and challenging this
legal claim.
One Junum liability, involving a former subsidiary of Junum, involves
unpaid prior years' payroll taxes and related penalties and interest. The
Company has obtained advice from expert legal counsel that it is remote or
not reasonably possible that the Company can be held liable by the IRS as
a "Responsible Party" for these payroll taxes. Accordingly, no contingent
liability was recorded at December 31, 2004.
F-14
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence of an
arrangement, delivery has occurred, the fee is fixed or determinable,
collectibility is reasonably assured, and there are no substantive
performance obligations remaining.
Consulting fee revenues, based on a percentage of the lottery tickets
sold, is recognized in the period the lottery tickets are sold.
Cash and Cash Equivalents
The Company considers 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
----------------------
Computer equipment 3-5 years
Furniture and fixtures 7 years
Leasehold improvements 10 years
Long-Lived Assets
The Company periodically evaluates the value of long-lived assets for
potential impairment. If an impairment is indicated, based on estimated
undiscounted future cash flows that are less than the carrying value of
the asset, such impaired assets are written down to their estimated fair
value. There were no impairment charges recorded during 2004, 2003 or the
cumulative period from May 10, 2002 (Inception) to December 31, 2004.
F-15
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Assets - Intangible Assets
Intangible assets consist mainly of copyrights and trademarks in the PRC,
which totaled $39,158 at December 31, 2004. Intangible assets with lives
restricted by contractual, legal, or other means are amortized over their
useful lives. Amortization expense is calculated using the straight-line
method over their estimated useful lives of 10 years. There was $200
recorded as amortization expense and accumulated amortization for the year
ended December 31, 2004 and the cumulative period from May 10, 2002 to
December 31, 2004. There was no amortization recorded during 2003. Most of
these intangible assets have not yet been placed in service.
Start-Up Costs
The Company, 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", expenses all start-up and
organizational costs as they are incurred. Preproduction design and
development costs for the television program in the PRC are expensed as
incurred. This program was developed to help market the welfare lotteries
and to increase consulting revenues.
Equity-Based Compensation
The Company accounts 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.
Statement of Financial Accounting Standard (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.
F-16
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
The Company did not provide any current or deferred income tax provision
or benefit for any periods presented to date because it has experienced a
net operating loss since inception.
Fair Value of Financial Instruments
The recorded amounts of financial assets and liabilities at December 31,
2004 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.
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
Company places its cash with high credit quality institutions.
Substantially all cash is deposited in one prominent U.S. bank.
F-17
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loss Per Share
The Company accounts for loss per share under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 128, "Loss 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
The Company follows Statement of Financial Accounting Standards No. 130,
"Disclosures about Segments of an Enterprise and Related Information." The
Company currently operates and reports as a single segment.
Recently Issued Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board published FIN
No. 46R, "Consolidation of Variable Interest Entities (revised December
2003)", superseding FIN 46, and exempting certain entities from the
provisions of FIN 46. Generally, application of FIN 46R is required in
financial statements of public entities that have interests in structures
commonly referred to as special-purpose entities for periods ending after
December 15, 2003, and for other types of VIEs for periods ending after
March 15, 2004.
The Company does not expect the adoption of the above recently-issued
accounting pronouncement to have a material impact on its financial
position and results of operations.
F-18
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment".
SFAS No. 123R is a revision of SFAS No.123, "Accounting for Stock-Based
Compensation", and supersedes APB 25. Among other items, SFAS 123R
eliminates the use of APB 25 and the intrinsic value method of accounting,
and requires companies to recognize the cost of employee services received
in exchange for awards of equity instruments, based on the grant date fair
value of those awards, in the financial statements. The effective date of
SFAS 123R is the first reporting period beginning after June 15, 2005,
which is third quarter 2005 for calendar year companies, although early
adoption is allowed. SFAS 123R permits companies to adopt its requirements
using either a "modified prospective" method, or a "modified
retrospective" method. Under the "modified prospective" method,
compensation cost is recognized in the financial statements beginning with
the effective date, based on the requirements of SFAS 123R for all
share-based payments granted after that date, and based on the
requirements of SFAS 123 for all unvested awards granted prior to the
effective date of SFAS 123R. Under the "modified retrospective" method,
the requirements are the same as under the "modified prospective" method,
but also permits entities to restate financial statements of previous
periods based on pro forma disclosures made in accordance with SFAS 123.
The Company currently utilizes a standard option pricing model (i.e.,
Black-Scholes) to measure the fair value of stock options granted to
Employees. The Company has not yet determined which model it will use to
measure the fair value of employee stock options upon the adoption of SFAS
123R. See Note 11 for further information.
SFAS 123R also requires that the benefits associated with the tax
deductions in excess of recognized compensation cost be reported as a
financing cash flow, rather than as an operating cash flow as required
under current literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after the effective
date. These future amounts cannot be estimated, because they depend on,
among other things, when employees exercise stock options.
The Company currently expects to adopt SFAS 123R effective for the annual
period ending December 31, 2005; however, the Company has not yet
determined which of the aforementioned adoption methods it will use.
F-19
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
3. LOSS PER SHARE
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.
The weighted average number of shares outstanding prior to the Acquisition
Date has been computed using the shares of the Operating Subsidiary
restated into the number of Company shares into which they were converted
at the Acquisition Date. The weighted average number of shares outstanding
subsequent to the Acquisition Date is based on the Company's shares
outstanding. Common stock equivalents, including warrants totaling
7,091,181 and 5,802,953 at December 31, 2004 and 2003, respectively, are
not included in the diluted loss per share for the years ended December
31, 2004 and 2003 and for the cumulative period from May 10, 2002 to
December 31, 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 $.75 per share. Substantially all of the warrants expire on
December 28, 2008.
4. INDEMNIFICATION AND SETTLEMENT AGREEMENT
On October 15, 2003, the Company entered into a comprehensive settlement
("Indemnification Agreement") and mutual release agreement with former
holders of the Company's warrants, who received those warrants upon the
conversion of preferred stock that was previously held by them, and some
of the Company's prior service providers (collectively, the "Settling
Parties"). In March 2004, the 4,000,000 shares held by the Settling
Parties were sold in a private transaction to an unrelated third party
shareholder, who also was a holder of a secured subordinated debenture for
financing up to $2.5 million. The settling parties were released from
investing any of proceeds from the sale of the 4 million shares back to
the Company.
F-20
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
5. EQUIPMENT
Equipment at cost at December 31, 2004 consists of:
Computer software and equipment $ 32,729
Furniture and fixtures 272,989
Leasehold improvements 56,466
---------
Total 362,184
Less: Accumulated depreciation and amortization (42,142)
---------
Total $ 320,042
=========
Depreciation expense for the years ended December 31, 2004 and 2003 and
for the cumulative period from May 10, 2002 (Inception) to December 31,
2004 were $37,438, $4,704, and $42,142, respectively. The total net book
value of equipment and leasehold improvements in the PRC was $78,475 at
December 31, 2004.
6. 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, 2004, the Operating Subsidiary has available a federal
net operating loss carryforward to offset future taxable income of
approximately $5,911,000. Junum has approximately a $22,400,000 net
operating loss carryforward prior to the Acquisition Date. The federal net
operating loss carryforwards expire during the years 2012 through 2023.
The utilization of the Junum 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 will result in the expiration of all of the net operating
loss from Junum before its utilization. Win Win Shanghai has a net
operating loss carryforward for PRC income tax reporting purposes of
approximately $837,000.
The Company has recorded a full valuation allowance against the deferred
tax assets of $4,087,711, which consists of the stock compensation expense
of $1,721,026 and the federal net operating loss carryforwards of
$2,366,685, 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
2004 and 2003 was an increase of approximately $2,460,172 and $1,055,720,
respectively.
F-21
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
6. INCOME TAXES (Continued)
Loss from domestic and foreign operations before income taxes included the
following:
FOR THE YEAR ENDED DECEMBER 31,
2004 2003
---------- ----------
U.S. loss $6,191,726 $3,016,342
Foreign loss 837,337 --
---------- ----------
Total $7,029,063 $3,016,342
========== ==========
7. NOTE PAYABLE
Total interest costs incurred and expensed for the years ended December
31, 2004 and 2003 and for the cumulative period from May 10, 2002 to
December 31, 2004 was $4,627, $449,737 and $464,167, respectively.
Note Payable at December 31, 2004, consisted primarily of unsecured
convertible promissory payable of $37,500 with interest payable at an
annual interest rate of 12%. This note is convertible into 75,000 shares
of common stock. This Note Payable is past due at December 31, 2004.
8. STOCKHOLDERS' DEFICIENCY
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.
During the period of March 15, 2004 to May 14, 2004, the Company issued to
16 individual investors 5,280,000 shares of the Company's common stock at
two offering prices, $.25 per share, and $.60 per share in a private
placement under Regulation D of the Securities Act. The total amount
received from these stock transactions was $1,355,000.
F-22
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
8. STOCKHOLDERS' DEFICIENCY (Continued)
On April 26, 2004, the Company, in a private placement, issued 4,000,000
shares at $.50 per share to an investment fund, pursuant to Regulation D
of the Securities Act, for the aggregate amount of $2,000,000.
In August 2004 and December 2004, 25,000 non-qualified stock options were
exercised by one investor for an exercise amount of $10,000.
On April 20, 2004, the Company had issued 1,500,000 shares of its
restricted common stock as a signing bonus to a new officer, the Company's
President of China Operations, and valued at $.80 per share based on the
quoted market price at the date the shares were granted by the Board of
Directors, for an aggregate amount of $1,200,000. This expense was
included in stock-based compensation expense for the year ended December
31, 2004.
The Company had also issued 181,978 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, 2004 was $358,716. The Company also issued in 2004 1,205,000
stock warrants to consultants, to purchase common stock at an exercise
price of $.50 per share, for a three-year period. The total stock-based
compensation expense, calculated using the Black-Sholes model, at fair
market value recorded from the issuance of these warrants was $972,300 for
the year ended December 31, 2004.
On March 19, 2004, the former stockholders of the Operating Subsidiary
converted the $5 million debenture note and accrued interest payable of
$418,313 (refer to note 1), into 100,000 shares of the Company's common
stock. On April 1, 2004, one of the Company's directors, forgave $176,614
of principal and accrued interest under a debenture in exchange for
353,228 shares of common stock and three-year warrants to purchase 353,228
shares of common stock at an exercise price equal to $0.50 per share.
On March 10, 2004 the Company settled a preexisting legal claim against
Junum with Valueclick, Inc. The Company transferred 27,778 shares of
restricted common stock, valued at .90 per share, and paid $2,500 within
30 days of the settlement date, for a total settlement of $27,500. This
settlement was paid and there was no liability at December 31, 2004.
F-23
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
8. STOCKHOLDERS' DEFICIENCY (Continued)
On January 5, 2004, the Company settled a pre-existing legal claim against
Junum. The Company paid $60,000 in cash and issued 47,500 shares of its
common stock, valued at approximately $.95 per share on January 5, 2004
for total settlement of $107,500. The remaining liability at December 31,
2004 included in the caption "Accrued expenses" was $13,455.
9. LEGAL PROCEEDINGS
A former Chief Executive Officer, President and Director, ("prior CEO")
who was the largest stockholder of the Company prior to March 31, 2003,
has 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. The
complaints allege a breach of an employment contract, unauthorized removal
from the board of directors, and other breach of fiduciary duty, breach of
covenant of good faith and fair dealing, breach of a $1 million promissory
note, intentional and negligent interference with prospective business and
economic advantage, and seek damages in excess of $3,000,000 and other
relief. The Company is vigorously contesting these civil actions.
The Company has filed counter-claims against the prior CEO for fraud and
misappropriation of corporate assets, and is seeking damages.
On July 21, 2004, the Appellate Court reversed the trial court decision
with respect to the prior CEO removal from the board. Thereafter, on July
28, 2004, a majority of the stockholders of the Company removed all of the
Company's board members, including the prior CEO, and appointed the
current board members to the board thereby making moot any effect of the
Appellate Court's decision. The ramifications of such removal with respect
to the Company are currently unclear, although the Company believes that
it should have no material adverse effect on the Company. The Company
intends to take all necessary steps to ensure that the decision has no
material adverse effect on the past, current, or future operations of the
Company.
F-24
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space under an operating lease which contains
renewal and escalation clauses. Future minimum rental commitments for
noncancelable operating leases in effect as of December 31, 2004 are shown
in the table below. The aggregate minimum rental commitments for such
leases having terms of more than one year are approximately:
Operating
Year Leases
---- --------
2005 $121,524
2006 72,558
2007 49,452
--------
Aggregate minimum lease commitments $243,534
========
On December 15, 2003, the Company, through its Chinese wholly-owned
subsidiary, Win Win Shanghai, entered into a Cooperation Agreement (the
"Cooperation Agreement") with the Shanghai Welfare Lottery Issuing Center
("Shanghai Lottery") and a TV Cooperation Agreement (the "TV Cooperation
Agreement") with Shanghai Lottery.
Pursuant to the Cooperation Agreement, Shanghai Lottery retained Win Win
Shanghai on an exclusive basis to provide advice and counsel on lottery
management, lottery television programs, lottery sales, marketing,
promotion, distribution, and training of sales and marketing personnel
associated with the foregoing relating to a new online instant lottery
ticket game or series of games recently approved by the Central Government
of China ("Games") for rollout in the Shanghai municipal district. In
addition, Win Win Shanghai is obligated to provide the services necessary
to accomplish the production of a new online instant lottery ticket
television program tied to the Games for broadcast with one or more of
Shanghai Lottery's partners at local television stations.
Win Win Shanghai will bear all out-of-pocket costs relating to the
implementation of the foregoing services during the first year of the
three-year term of the Cooperation Agreement. During the second and third
years of the Cooperation Agreement, the cost of implementation shall be at
the expense of the lottery operation itself and paid out of the revenues
generated by the Games.
F-25
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
10. OTHER COMMITMENTS AND CONTINGENCIES (Continued)
In consideration for the services provided by Win Win Shanghai, Win Win
Shanghai will receive on a quarterly basis a percentage of the aggregate
gross revenue of the Games that are tied to the television shows, and the
specific Games that the parties designate in advance will benefit directly
from Win Win Shanghai's services, advice, action, investment in
out-of-pocket expenses, know-how or other intellectual property. The
percentage payable to Win Win Shanghai will be adjusted up or down in the
second and third years of the term of the Cooperation Agreement based on
increases or decreases in overall revenues derived from the Games.
The TV Cooperation Agreement further elaborates the agreement between Win
Win Shanghai and the Shanghai Welfare Lottery regarding the production of
a television program (the "TV Program") tied to the Games. Pursuant to the
TV Cooperation Agreement, Win Win Shanghai is obligated to retain Shanghai
Welfare Lottery or its affiliate to produce a pilot program at a cost to
Win Win Shanghai of $10,000. The pilot program will be used to obtain the
approval of the TV Program from regulating authorities in China. In
addition, Win Win Shanghai is obligated to pay Shanghai Welfare Lottery
for the production and broadcast of 50 original programs. The copyright
for the programs will remain with both parties. There were 21 episodes
aired in 2004. The remaining commitment to pay the Shanghai Lottery was
$217,500 at December 31, 2004.
The Company also has a rental agreement with a non-related party for the
offices occupied by Win Win Shanghai at $5,500 per month, expiring
September 2005.
Administaff, Inc. provides 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.
F-26
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
11. STOCK OPTION PLAN
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 30,000,000 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 2004, the Company granted nonqualified stock options to purchase
3,999,445 shares of the Company's common stock at exercise prices of $.40,
$.45, $.50, and $.72 per share. The options were 100% vested in 2004. The
difference between the exercise price and the market price of $0.90 per
share, when the non-qualified options were issued to employees, resulted
in a total of $1,614,000 recorded as stock-based compensation expense for
the year ended December 31, 2004.
As of December 31, 2004, the Company is obligated to issue 356,978 shares
of the Company's common stock that were awarded as share grants. Out of
that, a total of 350,000 shares, valued at $.90 per share on the date of
grant, was due to officers of the Company, resulting in stock-based
compensation expense of $315,000. This amount was recorded in "Due to
officers - accrued compensation".
Stock option transactions to the employees are summarized as follows:
2004
----------
Outstanding - January 1, 2004 --
Granted 4,199,445
Exercised (25,000)
Forfeited --
----------
Outstanding - December 31, 2004 4,174,445
==========
Shares exercisable - December 31, 2004 4,174,445
==========
F-27
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
11. STOCK OPTION PLAN (Continued)
The above table includes options issued to consultants of 979,445 shares
as of December 31, 2004. A total of 200,000 qualified 3-year options were
issued to employees of the Company, at an exercise price of $.90 per
share. A total of 3,020,000 non-qualified 5-year options were issued to
directors and officers of the Company, at exercise prices of $.95 and $.50
per share.
The following table provides certain information with respect to the
above-referenced stock options outstanding and exercisable at December 31,
2004:
Stock Weighted
Options Average
Outstanding Remaining
Exercise and Contractual
Prices Exercisable Life - Years
------- ----------- ------------
$ .40 35,000 1.25 years
$ .45 2,910,000 5 years
$ .50 510,000 3.4 years
$ .72 519,445 3 years
$ .90 200,000 3 years
All stock options outstanding at December 31, 2004 are exercisable. There
have been no significant modifications of outstanding stock option
rewards.
The fair values at date of grant for the options granted above was
$3,276,435 estimated using the Black-Scholes option valuation model with
the following assumptions:
Expected life in years 2-5 years
Risk-free interest rate 3.7%
Expected stock volatility 128%
Expected dividend yield 0%
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 2004
to employees, 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.
F-28
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
11. STOCK OPTION PLAN (Continued)
The Company's pro forma information for the years ended December 31, 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.
2004
-----------
Net loss as reported $(7,029,063)
Add: total stock-based
compensation expense included in
reporting income, all awards, net of
related tax effects (which were none) 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) (3,276,435)
-----------
Pro forma net loss $(8,691,498)
Basic and diluted loss per share - as reported $ (.18)
Basic and diluted loss per share - pro forma $ (.23)
12. SUBSEQUENT EVENTS
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.
F-29
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
12. SUBSEQUENT EVENTS (Continued)
The SPA permits 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 occur during the thirty-day period following the Closing
Date (the "Subsequent Offering Period"). The Initial Investor, however,
has 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 occurs, 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.
F-30
WINWIN GAMING, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
12. SUBSEQUENT EVENTS (Continued)
On March 16, 2005, the Company entered into revolving line of credit note
and agreements with Art Petrie and John Gronvall, two of the Company's
directors. Pursuant to the revolving credit arrangements, Mr. Petrie and
Mr. Gronvall are obligated to loan the Company up to an aggregate of
$1,000,000 ($500,000 each) until the loans mature on the earlier of (a)
the first anniversary of the revolving credit arrangements or (b) the date
that the Company is able to consummate an equity financing transaction in
which the Company receives aggregate gross proceeds of at least
$1,000,000.
Mr. Petrie and Mr. Gronvall are obligated to make advances and re-advances
under the revolving credit arrangements up to an aggregate of $1,000,000
($500,000 each) upon demand by the Company. All amounts outstanding under
these arrangements bear interest at a simple rate of 12% with a default
rate of interest at 16%. The Company would be in default under the
revolving credit arrangements if it fails to make any payments when due or
if a bankruptcy event occurs.
F-31
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
10.15 Revolving Credit Note and Agreement, dated March 16, 2005, between
the Company and Art Petrie.
10.16 Revolving Credit Note and Agreement, dated March 16, 2005, between
the Company and John Gronvall.
21. A description of the subsidiaries of the Company
23.1 Consent of Asher & Company, Ltd.
23.2 Consent of Livingston, Wachtell & Co., LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certifications
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10KSB’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 2/25/10 | | 64 |
| | 12/28/08 | | 54 |
| | 12/31/07 | | 43 |
| | 12/31/05 | | 53 | | | | | 10KSB, 5, NT 10-K |
| | 9/30/05 | | 32 | | | | | 10QSB, 8-K |
| | 6/24/05 | | 64 |
| | 6/15/05 | | 53 |
| Filed on: | | 3/21/05 | | 34 |
| | 3/16/05 | | 14 | | 66 |
| | 2/28/05 | | 31 | | 36 | | | 8-K |
| | 2/25/05 | | 1 | | 63 | | | 8-K |
| For Period End: | | 12/31/04 | | 1 | | 65 | | | 5, 5/A |
| | 12/30/04 | | 28 | | 29 |
| | 12/29/04 | | 27 |
| | 12/8/04 | | 30 |
| | 11/10/04 | | 11 | | 30 | | | DEF 14C |
| | 10/18/04 | | 11 | | 56 |
| | 10/7/04 | | 22 | | | | | 8-K |
| | 10/4/04 | | 21 | | 32 | | | 3, 8-K |
| | 8/7/04 | | 5 | | 7 |
| | 7/28/04 | | 10 | | 58 | | | 8-K |
| | 7/21/04 | | 10 | | 58 | | | 8-K |
| | 7/11/04 | | 13 |
| | 6/30/04 | | 31 | | | | | 10QSB |
| | 6/9/04 | | 8 |
| | 5/14/04 | | 56 | | | | | 3, 4, NT 10-Q |
| | 4/30/04 | | 31 |
| | 4/26/04 | | 57 |
| | 4/20/04 | | 57 |
| | 4/1/04 | | 29 | | 57 |
| | 3/19/04 | | 4 | | 57 | | | 4 |
| | 3/16/04 | | 29 |
| | 3/15/04 | | 52 | | 56 |
| | 3/10/04 | | 57 |
| | 2/12/04 | | 24 | | 28 |
| | 1/5/04 | | 58 |
| | 1/2/04 | | 31 | | | | | 8-K |
| | 1/1/04 | | 23 | | 61 |
| | 12/31/03 | | 11 | | 56 | | | 10KSB, NT 10-K |
| | 12/15/03 | | 4 | | 59 | | | 8-K |
| | 12/5/03 | | 22 | | 61 | | | 3, 3/A, 8-K |
| | 11/28/03 | | 42 |
| | 10/15/03 | | 54 |
| | 10/8/03 | | 30 |
| | 9/30/03 | | 30 | | | | | 10QSB |
| | 5/15/03 | | 45 |
| | 5/12/03 | | 45 |
| | 3/31/03 | | 3 | | 58 | | | 10QSB, 10QSB/A, 8-K, 8-K/A, NT 10-K, NT 10-Q |
| | 3/17/03 | | 45 |
| | 2/15/03 | | 29 |
| | 12/31/02 | | 4 | | 42 | | | 10KSB, 8-K, NT 10-K |
| | 10/21/02 | | 4 |
| | 10/18/02 | | 10 |
| | 5/10/02 | | 13 | | 56 |
| | 10/3/00 | | 30 |
| | 6/30/00 | | 30 | | | | | 10KSB, NT 10-K |
| | 12/30/99 | | 30 |
| | 6/30/96 | | 30 | | | | | 10-K, 10-K/A, NT 10-K |
| | 6/26/96 | | 30 | | | | | 8-K |
| | 2/2/95 | | 30 |
| | 4/29/93 | | 30 |
| | 12/31/92 | | 48 |
| | 12/30/92 | | 3 | | 42 |
| List all Filings |
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