UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 000-24520
GWIN, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 04-3021770
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5092 S. Jones Boulevard, Las Vegas, Nevada 89118
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(Address of principal executive offices)
(702) 967-6000
---------------------------
(Issuer's telephone number)
N/A
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(Former name, former address and
former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 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 [ ]
As of October 31, 2004 the Company had 87,665,496 shares of its $.0001 par
value common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
GWIN, Inc.
Index to Form 10-QSB
Page
Part I - FINANCIAL INFORMATION ................................. 3
Item 1. Financial Statements .............................. 3
Consolidated Balance Sheet at October 31, 2004
(Unaudited) ............................................. 3
Consolidated Statements of Operations for the three
months ended October 31, 2004 and 2003(Unaudited)...... 4
Consolidated Statements of Cash Flows for the
three months ended October 31, 2004 and 2003
(Unaudited) ............................................ 5
Notes to Financial Statements .......................... 7
Item 2. Management's Discussion and Analysis or Plan
of Operation .............................................. 11
Item 3. Internal Controls ................................. 17
Part II - OTHER INFORMATION .................................... 17
Item 1. Legal Proceedings ................................. 17
Item 2. Change in Securities and Use of Proceeds .......... 17
Item 3. Defaults Upon Senior Securities ................... 17
Item 4. Submission of Matters to a Vote of Securities
Holders ................................................... 17
Item 5. Other Information ................................. 17
Item 6. Exhibits and Reports on Form 8-K .................. 18
SIGNATURES ..................................................... 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GWIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS October 31,
2004
------------
Current assets:
Accounts Receivable $ 310,186
Prepaid Expenses 174,120
------------
Total current assets 484,306
------------
Property & equipment (net) 100,036
Equipment held under capital leases (net) 5,224
Deposits & other assets 502,904
------------
Total assets $ 1,092,470
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdrafts $ 109,138
Current portion of long-term debt 627,132
Accounts payable - related parties 144,142
Notes payable - related parties 229,528
Deferred revenue 793,000
Accounts payable 477,588
------------
Total current liabilities $ 2,380,528
------------
Long term debt, less unamortized discount of $50,382 227,151
------------
Total liabilities $ 2,607,679
------------
Stockholders' deficit:
Preferred stock - $0.0001 par value; 5,000,000 shares
authorized; 0 shares issued & outstanding 0
Common stock - $0.0001 par value; 150,000,000 shares
authorized; 87,665,496 shares issued & outstanding 8,770
Additional paid in capital 25,070,430
Accumulated deficit (26,542,741)
Prepaid Expenses - Related parties (51,667)
------------
Total stockholders' deficit (1,515,209)
------------
Total liabilities and stockholders' deficit $ 1,092,470
============
The accompanying notes are an integral part of these consolidated financial
statements.
3
GWIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended October 31,
2004 2003
------------ ------------
Net revenue services $ 862,925 $ 1,845,379
Revenues advertising 298,550 461,608
------------ ------------
Total revenues 1,161,475 2,306,987
------------ ------------
Handicapping fees 52,659 99,215
Handicapping fees related party 102,743 114,438
Advertising expense 773,045 1,057,838
Commissions 398,223 645,061
Salaries & wages 284,436 315,016
Professional fees 14,039 45,669
General & administrative 298,282 411,819
Depreciation expense 15,236 11,984
------------ ------------
Total operating expense 1,938,662 2,701,040
Operating (loss) (777,187) (394,053)
Interest (expense), including amortization
of debt discount (23,403) (97,586)
Other non-cash costs of financing (33,750) (50,000)
Interest (expense) related parties (7,322) (48,819)
------------ ------------
Net (loss) $ (841,662) $ (590,458)
============ ============
Basic and diluted (loss) per share
of common stock $ (0.01) $ (0.01)
Basic and diluted weighted shares of
common stock outstanding 84,700,523 54,605,313
The accompanying notes are an integral part of these consolidated financial
statements.
4
GWIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended October 31,
2004 2003
------------ ------------
Cash flows - operating activities:
Net (loss) $ (841,662) $ (590,458)
Adjustments to reconcile net (loss)
to net cash used in operations:
Depreciation 15,236 11,984
Services & settlements paid with common
stock and warrants 0 50,000
Amortization of Prepaid Expenses -
Related Parties 15,000 0
Interest expense - amortization of debt
discount 12,184 99,708
Decrease (increase) in:
Accounts receivable (272,693) (141,308)
Prepaid expenses (145,234) (56,490)
Other assets (180,727) (16,367)
Increase (decrease) in:
Deferred revenue 480,809 298,581
Accounts payable 32,374 45,624
Accounts payable - related parties 107,322 (42,278)
Other current liabilities 10,041 (87,762)
------------ ------------
Total adjustments 74,313 161,692
------------ ------------
Total cash (used in) operating activities (767,350) (428,766)
------------ ------------
Cash flows - investing activities:
Purchase of property and equipment (8,848) (29,048)
------------ ------------
Total cash (used in) investing activities (8,848) (29,048)
------------ ------------
Cash flows - financing activities:
Cash Overdrafts 109,138 0
Proceeds from issuance of notes payable
- related parties 0 925,559
Payments on long-term debt & lease
obligations (2,408) (1,042,943)
Proceeds from issuance of common stock 230,000 427,793
------------ ------------
Total cash provided by financing activities 336,730 310,409
------------ ------------
Net (decrease) in cash (439,468) (147,405)
Cash - beginning of the periods 439,468 420,814
------------ ------------
Cash - end of the periods $ 0 $ 273,409
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES
For the three months ended October 31, 2004 and 2003, the Company paid $0 for
taxes and $ 11,371 for interest and $0 for taxes and $24,722 for interest,
respectively. The Company issued stock and warrants in payment for
professional services and settlement costs; For the three months ended October
31, 2004 and 2003, the Company issued 0 and 200,000 share of common stock,
respectively for such services. For the three months ended October 31, 2004
and 2003, the Company also issued shares in repayment of debt; The Company
issued 1,500,000 and 4,697,272 such shares as repayment for $110,000 and
$925,559 of interest and principal, respectively.
6
GWIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - Organization and Operations
GWIN, Inc., and subsidiaries, (the "Company") is headquartered in Las
Vegas, Nevada. The Company primarily develops, produces and markets sports
handicapping analysis and information via television, radio and the Internet.
The Company is engaged in a highly seasonal business, with the majority
of sales related to football and basketball handicapping. Due to this
seasonality, quarterly results may vary materially between the football and
basketball seasons, concentrated in the first and the second quarter of the
Company's fiscal year, and the remainder of the year.
NOTE 2 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary in
order to make the interim financial statements not misleading have been
included. Results for the interim periods are not necessarily indicative of
the results that may be expected for the fiscal year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended July 31, 2004. The results of the three months ended October 31, 2004
are not necessarily indicative of the results to be expected for the full year
ending July 31, 2005.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiary, Global SportsEDGE, as
well as several inactive subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Earnings (Loss) Per Share - "Basic" earnings (loss) per share equals net
income divided by weighted average common shares outstanding during the
period. "Diluted" earnings per common share equals net income divided by the
sum of weighted average common shares outstanding during the period plus
common stock equivalents if dilutive. For the three months ended October 31,
2004 and 2003, the number of common stock equivalents excluded from the
calculation was 18,436,691 and 21,872,350 respectively.
Stock Options and Similar Equity Instruments - The Company has adopted
the disclosure requirements of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," for stock options
and similar equity instruments (collectively "Options") issued to employees
and directors; however, the Company will continue to apply the intrinsic value
based method of accounting for options issued to employees
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prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" rather than the fair value based method of
accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to
transactions in which an entity issues its equity instruments to acquire goods
and services from non-employees. Those transactions must be accounted for
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. No options
were granted during the periods ended October 31, 2004 or 2003.
Revenue Recognition - Service and advertising contracts vary
substantially in length from a single sporting event to entire seasons. The
Company recognizes the revenue from service contracts ratably, over the
estimated term of the underlying contracts. It is important to note that
while revenue from service contracts is deferred and recognized only as the
service is delivered, the bulk of the costs associated with generating that
revenue including advertising, commissions, and handicapping fees are expensed
in the quarter that the service contract is generated.
Operating Costs & Expenses - Handicappers' fees and sales
representatives' compensation and related expenses are charged to operations
as incurred because the Company believes these costs have no future economic
benefit.
Convertible Debentures - In September, 2002, we entered into an
agreement with Newmarket Investments, plc ("Newmarket"), an existing
convertible debenture holder, which provided that Newmarket invest an
additional $700,000 in the Company by amending the existing $500,000
convertible debenture held by Newmarket to reflect a principal amount of
$1,200,000. In October 2003 through January 2004 Newmarket converted the
entire $1,200,000 of the convertible debenture in exchange for 9,230,769
shares of common stock.
The agreement with Newmarket also provided that Newmarket provide a
standby credit facility for $250,000, bearing interest at 16% per annum. At
October 31, 2004 the Company owes $155,515 in principle and interest on the
note.
The Company has convertible debentures outstanding as of October 31, 2004
totaling $694,000. The repayment schedule of such debt is as follows: $119,000
due January of 2005, $25,000 due January 2006, $250,000 due June 2005, and
$300,000 due June 2005. All of the convertible debt outstanding has a
mandatory conversion feature, and must be paid in common stock upon maturity.
The Company has recorded these convertible debentures, net of associated
discounts, as components of long-term debt on the balance sheet.
Preferred Stock - At October 31, 2004 the Company had no Preferred Stock
outstanding.
8
Common Stock During the three month period ended October 31, 2004 the
Company issued common stock for cash and to repay debt. The Company issued
1,500,000 shares of common stock to a debt-holder of the Company; these shares
were valued at a total of $110,000 which was the total amount of principal and
interest which was paid by this issuance. The Company also issued 2,875,000
shares to investors; these shares were valued at $230,000, which was the cash
received for these shares.
NOTE 3 - Going Concern
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation
of the Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business.
The Company incurred a net loss of $841,662 for the three months ended
October 31, 2004 and has an accumulated deficit of $26,542,741 at October 31,
2004. The Company believes that it will need additional financing and cash to
fund projected increases in required credit card deposits. The Company has
credit card deposits of approximately $485,000 currently (which is accounted
for as deposits on the balance sheet) and management estimates that this
number may increase to approximately $950,000. These deposits are earned funds
that are held by the credit card processors under the processing agreements of
Company. The required deposits change based upon the amount of transactions
processed and the processors' estimation as to the risks related to the
business. The entire amount of these deposits will be remitted to GWIN upon
termination of the underlying credit card processor relationships. The
Company also has current and non-current debt outstanding, for which it will
be unable to pay from operations. These operating losses and operational
requirements, as well as the uncertain sources of financing, create an
uncertainty about the Company's ability to continue as a going concern.
The Company will continue to seek additional infusion of capital from
accredited investors and institutional lenders until the Company is
operationally profitable. Subsequent to the end of the quarter being
reported, the Company completed a Convertible Debt financing [Note 6] that
management believes will provide the Company with capital it requires to fund
its ongoing operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
NOTE 4 - Commitments
Legal Matters - In the normal course of business, the Company is exposed
to a number of asserted and unasserted potential claims. The Company is not
currently a party to any legal proceedings either as a defendant or as a
plaintiff.
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NOTE 5 - Tax Expense
The Company has not accrued Income Tax Expense for the periods ended
October 31, 2004 and 2003 at its statutory rates due to unused net operating
losses and acquired net operating losses.
NOTE 6 Subsequent Events
In November of 2004 the Company completed a $600,000 placement of
convertible debt with Laurus Master Fund, LLC. The details of this transaction
were disclosed in an 8-K filing with the Securities and Exchange Commission
which was filed on December 1, 2004. The Company is using the funds raised for
operational purposes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with the consolidated Balance
Sheet as of October 31, 2004 (unaudited) and the unaudited Statements of
Operations and Cash Flows for the three months ended October 31, 2004 and
2003, and the related notes thereto, as well as the audited financial
statements of the Company included in the Company's annual report on Form 10-
KSB for the year ended July 31, 2004 filed with the Securities and Exchange
Commission on November 1, 2004. This discussion contains forward-looking
statements based upon current expectations that involve risks and
uncertainties, such as our plans, objectives, expectations and intentions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated, or projected. We caution you not to place
undue reliance on any forward-looking statements, all of which speak only as
of the date of this report. You should refer to and carefully review the
information in future documents we file with the Securities and Exchange
Commission.
One of the attractive aspects of our business is that we generate revenues
from multiple sources. The two major sources are "Services Revenues", and
"Advertising Revenues".
"Service Revenues" are generated by selling the handicapping advice and
analysis of our professional handicappers. Services Revenue is generated from
respondents to our various media promotions including those promoted on our
weekly 30-minute television program called "Wayne Allyn Root's WinningEDGE ",
which, during the 2004 football season, has aired nationally on the Spike TV
Network. We also produce an hour long radio program called The WinningEDGE
that airs on selected radio stations nationwide. In addition to The
WinningEDGE television and radio programs, we advertise our services on radio
in various markets and in selected print media including the week-end edition
of USA Today. During a football weekend we will receive as many as 10,000 to
15,000 phone calls in response to our offers. These calls are returned by our
team of sports account representatives in our office in Las Vegas. The
account representative offers the caller a variety of handicapping packages
for the services of our handicappers. Our handicapping services are also
offered and sold on our Web site, www.WinningEDGE.com. The Web site provides
free live odds, scores, schedules, injury and weather reports and free picks
from our professional handicappers, as well as the opportunity for visitors to
purchase a broad selection of picks and services offered through the site.
The second major source of revenue for the Company is "Advertising
Revenues". Advertising Revenues are revenues generated from payments made to
the Company from third party advertisers (sponsors) on our various television,
radio, print, and Internet properties. They also include revenues generated
from the rental of our customer databases to noncompetitive advertisers. The
Company has built a telemarketing, direct mail, and email databases totaling
over 200,000 potential clients who have
11
contacted us through our various media promotions. Although not recorded as an
asset on the Company's Balance Sheet, the Company considers its databases to
be extremely valuable assets both as a continuing lead source for our
handicapping services and as an additional source of revenue from the rental
of our customer lists. As described below, the value of this database was
demonstrated when a major portion of it was hacked into and stolen last fall.
The Company believes that this theft cost the Company approximately $2 million
in revenues, and as discussed below, is a primary factor why Operating
Revenues are lower in the first fiscal quarter of 2005 than they were in the
first fiscal quarter of 2004. The Company took aggressive steps including
hiring Robert Half & Associates and investing approximately $150,000 in
improved firewalls and database security to prevent any further database
losses. The Company believes that it is now well positioned to continue to
rapidly grow both Service and Advertising Revenues.
Total Revenues for the three months ended October 31, 2004 were
$1,161,475 compared to Total Revenues for the three months ended October 31,
2003 which were $2,306,987. This decrease is a combination two primary
factors: First, during the preceding year the Company was the victim of an
Internet hacking theft of the Company's database and customer lists as
disclosed in our quarterly report to the Securities and Exchange Commission
for the period ended January 31, 2004.
This theft caused a significant decline in sales to existing customers
during the third and fourth quarters of the Company's fiscal year 2004. The
decline was caused primarily by the stolen customer lists being sold to our
competitors whose sales representatives convinced some clients to purchase
their services rather than the Company's services, or who simply badgered the
Company's clients to such an extent that they stopped purchasing handicapping
services all together. Since the Company does not normally advertise for new
customers during the third and fourth quarters of the fiscal year, the Company
is reliant upon reselling its existing customers and potential clients already
in its database until it begins its seasonal advertising program coinciding
with the start of the professional football season.
An additional factor is that the 2004-2005 professional football season
began September 11, 2004 which is one week later than the prior year.
Consequently, the amount of Service Revenues generated during the first two
months of the first fiscal quarter (August through October) together with a
lower than normal amount of deferred Service Revenue that was available to
carry forward into the first fiscal quarter, resulted in the decline in
reported revenues for the quarter. Due to the accounting requirement that
sales only be recognized as Service Revenue during the quarter the services
are provided, $793,000 has been recorded as a Deferred Revenue liability on
the Balance Sheet and not as Operating Revenue for the Quarter. As an
example, if, on October 1, a $4,000 sale is made for services for the
remainder of the football season, then, since the football season runs through
January 2005, only one fourth of that sale ($1,000 for the month of October)
is recorded as first quarter income and the balance ($3,000 for November,
December & January) is recorded as Deferred Revenue on the Balance Sheet.
Most of the revenue deferred in the first quarter of the fiscal year will be
recorded as Operating Revenue during the second fiscal quarter.
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Even though a only portion of the sales made during the first fiscal
quarter are recorded as Deferred Revenue and not as Operating Revenue during
the Quarter, all costs associated with generating that sale are recorded as
expenses for during the quarter in which they were incurred. The result of
this accounting treatment is that during periods, such as the fiurst fiscal
quarter with large increases in the amount of Deferred Revenue, reported
Operating Revenues will be lower than actual sales while expenses are fully
accounted for, thus reducing reported Operating Profits for the quarter.
The decline in Advertising Revenue for the quarter is also related to the
accounting treatment of advertising sales. The Company made the strategic
decision to seek sponsors that would advertise with the Company on a year-
round basis rather than only during the heavy fall promotional period. While
this decision has negatively impacted this quarter, it will allow for a more
evenly reported revenue stream throughout the balance of the year. Insofar as
the Company has received pre-payments for these advertising services, they are
recorded as Deferred Revenues.
Several things are important to note: (i) Most of the Deferred Revenue
from the first fiscal quarter will be captured as increased Operating Revenue
for the Quarter ending January 31, 2005. Since essentially all the costs
associated with generating these Deferred Revenues was recorded as expense in
the quarter ended October 31, 2004, this higher Deferred Revenue can be
expected to make a substantial contribution to Operating Revenue and Operating
Profit for the second quarter which ends January 31, 2005; (ii) Total gross
sales during the month of November and continuing into December, just prior to
releasing this report, exceeded gross sales in the comparable period last
year, demonstrating that the negative effects of the theft of the database is
now behind us and is not expected to be a factor in the future; (iii) The
Company retained Robert Half and Associates, a leading technology consulting
firm, to review and improve our firewalls and database security.
Approximately $150,000 was spent on this task and the task is now complete.
This amount was expensed as incurred.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, we make estimates, assumptions and
judgments that can have a significant effect on our revenues and net income or
net loss, as well as on the value of certain assets on our balance sheet. We
believe that there are several accounting policies that are critical to an
understanding of our historical and future performance as these policies
affect the reported amounts of revenues, expenses, and significant estimates
and judgments applied by management. While there are a number of accounting
policies, methods and estimates affecting our financial statements, two areas
of particular significance are identified. One of theses areas is the
deferral estimate applied to revenues and the other area is the pricing of
options and warrants issued by the Company. In addition, please refer to Note
1 to the accompanying consolidated financial statements for further discussion
of our accounting policies.
Our service contracts with clients vary substantially in length from a
single sporting event to entire seasons. We recognize the revenue from
service contracts ratably, over the estimated term of the underlying service
13
contract. It is important to note that while revenue from service contracts
is deferred and recognized as the service is delivered, the bulk of the costs
associated with generating that revenue including advertising, commissions,
and handicapping fees are expensed in the quarter that the service contract is
generated.
In the past two years, we have issued substantial amounts of warrants and
options to purchase common stock in connection with financing activities and
as payment for services and other items. We record the cost attributable to
those issuances on the basis of the Black-Scholes option valuation model. The
use of this model requires some highly subjective assumptions including
expected stock price volatility.
COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 2004 TO THE THREE MONTHS ENDED
OCTOBER 31, 2003
REVENUES. Net Service Revenues from sports handicapping services (after
charge-backs and changes in Deferred Revenue) decreased from $1,845,379 for
the three months ended October 31, 2003 to $862,925 for the same period in
2004, a decrease of 53%. This decrease was primarily the result of a theft of
the Company's database and client list in the preceding year causing Deferred
Revenue going into the first quarter to decrease and lower sales until a new
database of client leads could be generated from the Company's promotional
activities, which generally began approximately midway through the quarter.
Management believes that the financial impact of the theft has now been
absorbed. As proof of the rebound in Service sales, for the month of November
2004 the Company had its second best sales month in its history with November
2004 service sales exceeding those of November 2003. Advertising Revenue
decreased from $461,608 for the three months ended October 31, 2003 to
$298,550 for the same period in 2004, a decrease of 35%. This decrease is
primarily a result of the Company's decision to write advertising contracts
with our sponsors for a full year instead of only advertising for the football
season. The Company feels this will allow sponsors to benefit from advertising
year round on the Internet as well as in the fall on the television and radio
programs. This has caused a negative impact on first quarter revenues, but the
Company will benefit by having Advertising Revenues more evenly distributed
during the remainder of the fiscal year.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses were
$1,938,662 for the three months ended October 31, 2004 compared to $2,701,040
for the same period in 2003, a decrease of 29%. A detailed breakdown of those
costs and expenses follows:
Handicapping fees decreased from $213,653 for the three months ended
October 31, 2003 to $155,402 for the same period in 2004, a decrease of 27%.
These fees are based upon a percentage of revenues before changes in Deferred
Revenue and the total amount in 2004 is consistent with the appropriate
relationship to revenues and our agreements with our handicappers.
Advertising Expenses, including production costs, decreased from
$1,057,838 for the three months ended October 31, 2003 to $773,045 for the
same period in 2004. This 26% decrease is a direct result of better pricing
for television and radio time due to having a branded show on national
14
television for 5 years, and using better point of sale software to quickly
determine where the best return on leads is being generated.
Commission Expense decreased from $645,061 for the three months ended
October 31, 2003 to $398,223 for the same period in 2004, a decrease of 39%.
Commissions are based upon a percentage of revenues before changes in Deferred
Revenue and is lower due to lower sales in the three months ended October 31,
2004.
Salaries and Wages decreased from $315,016 for the three months ended
October 31, 2003 to $284,436 for the same period in 2004, a decrease of 9%.
This is primarily the result of better pricing on health care insurance due to
changing carriers.
Professional Fees decreased from $45,669 for the three months ended
October 31, 2003 to $14,039 for the same period in 2004, a 65% decrease. The
decrease is primarily due to lower legal expenses during the three months
ended October 31, 2004.
General and Administrative Expenses decreased from $411,819 for the three
months ended October 31, 2003 to $298,282 for the same period in 2004, a
decrease of 27%. This decrease is primarily a result of a decrease in credit
card processing fees due to lower sales and better pricing on telephone rates.
Seasonality
Our business is highly seasonal. Because football and basketball are the
most popular sports for wagering, the demand for the handicapping analysis and
selections for these sports is substantially higher than for other sporting
events. As a result, approximately 70% of our sales occur in the first and
second quarters of the Fiscal Year. Because of these factors, our quarterly
operating results are difficult to predict and are likely to vary in the
future. We have traditionally experienced higher net sales in the first and
second quarters of the Fiscal Year and lower net sales in the third and fourth
quarters of the Fiscal Year. We expect this seasonality to continue for the
foreseeable future. If we are ultimately successful in pursuing our strategy
to expand our handicapping services to cover other sports that are popular
internationally, such as soccer and cricket, we may reduce the seasonality of
our business. However, there can be no assurance that future seasonal
fluctuations will not adversely affect the business or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital deficit as of October 31, 2004, was $1,896,222 as
compared to a working capital deficit of $1,243,175 as of July 31, 2004. Of
the October 31, 2004 amount, approximately $793,000 represents revenues from
sales which will not be recognized until after October 31, 2004. During the
three months ended October 31, 2004, we raised approximately $230,000 from
accredited investors.
15
In November, 2004 the Company completed a Convertible Debenture placement
for $600,000 (see Subsequent Events Note). The Company believes that this
additional financing and cash flow from operations will be sufficient to fund
the Company's operating requirements. The Company may continue to seek
additional infusions of capital.
SUMMARY OF CASH FLOWS FOR THE THREE MONTHS ENDED OCTOBER 31,2004
GWIN's cash decreased approximately $548,606 during the three months
ended October 31, 2004. The decrease was a result of the operating loss of
$841,663, which was offset in part by the $230,000 in proceeds from the
issuance of equity.
OPERATING ACTIVITIES
Net cash used in operating activities increased from $428,766 in the
three months ended October 31, 2003 to $767,350 in the three months ended
October 31, 2004. The primary reason was the increase in the net loss from
$590,458 in the three months ended October 31, 2003 to $841,663 in the three
months ended October 31, 2004 and an increase in deferred revenue.
INVESTING ACTIVITIES
Net cash used in investing activities decreased from $29,048 during the
three months ended October 31, 2003 to $8,848 during the three months ended
October 31, 2004 because fewer assets were purchased in the most recent three
months.
FINANCING ACTIVITIES
Net cash provided by financing activities increased from $310,409 during
the three months ended October 31, 2003 to $336,930 during the three months
ended October 31, 2004. Included in the amount for the three months ended
October 31, 2004, $230,000 was received from the sale of common stock and
$109,138 was the result of bank overdrafts.
FORWARD LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are based on our
management's beliefs as well as assumptions and information currently
available to us. When used in this report, the words "believe," "expect,"
"anticipate," "estimate" and similar expressions are intended to identify
forward-looking statements. These statements are subject to risks,
uncertainties and assumptions, including, without limitation, our present
financial condition, the risks and uncertainties concerning the availability
of additional capital as and when required, the risks and uncertainties
concerning general economic conditions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, or
projected. We caution you not to place undue reliance on any forward-looking
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statements, all of which speak only as of the date of this report. You should
refer to and carefully review the information in future documents we file with
the Securities and Exchange Commission.
ITEM 3. INTERNAL CONTROLS
The Company maintains disclosure controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed pursuant to the Securities Exchange Act of 1934, as amended the
("Exchange Act"), is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer, who is our principal
executive officer, and our Chief Financial Officer, who is our principal
financial officer, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls subsequent
to the Evaluation Date.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended October 31, 2004, we sold 2,875,000
restricted shares of common stock at a price of $.08 per share to 2 persons
living outside of the United States, in reliance on the exemption provided by
Regulation S promulgated under the Securities Act of 1933, as amended. The
shares were sold to investors introduced by a Netherlands investment banking
firm which we paid a fee of 12% of the principal amount of the shares sold.
The appropriate restrictive legend was placed on the certificates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
ITEM 5. OTHER INFORMATION.
Inapplicable
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit No. Description Location
31.1 Certification of Chief Filed herewith
Executive Officer Pursuant electronically
to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Filed herewith
Financial Officer Pursuant electronically
to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Filed herewith
Executive Officer Pursuant electronically
to 18 U.S.C Section 1350
32.2 Certification of Chief Filed herewith
Financial Officer Pursuant electronically
to 18 U.S.C Section 1350
(b) Reports on Form 8-K.
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GWIN, Inc.
(Registrant)
Dated: December 10, 2004 By:/s/ Jeffrey Johnson
Jeffrey Johnson
Chief Financial Officer
Dated: December 10, 2004 By:/s/ Wayne Allyn Root
Wayne Allyn Root
Chairman and Chief Executive
Officer
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