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EX-31.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 302 - New Media Lottery Services Inc | v169525_ex31-1.htm |
EX-32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO SECTION 906 - New Media Lottery Services Inc | v169525_ex32-1.htm |
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended: October
31, 2009
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number: 000-49884
NEW
MEDIA LOTTERY SERVICES, INC.
(Exact
name of small business issuer as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
|
87-0705063
(I.R.S.
Employer Identification No.)
|
1400 Technology Drive,
Harrisonburg, Virginia 22802
(Address
of principal executive offices)
(540)
437-1688
(Issuer's
telephone number)
(Former
name, former address and former
fiscal
year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes o No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every
Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
o Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o (Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). oYes xNo
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
o Yes o No
APPLICABLE
ONLY TO CORPORATE ISSUERS
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date:
At
December 17, 2009 there were 33,897,843 shares of common stock
outstanding.
PART
I — FINANCIAL INFORMATION
Item
1. Financial Statements.
Unaudited
Consolidated Financial Statements
for
the Three and Six Months Ended October 31,
2009
|
Page
|
|
Condensed
Consolidated Balance Sheets as of October 31, 2009 (unaudited)
and
April 30, 2009 (audited)
|
F–1
|
Condensed
Consolidated Statements of Operations for the three months and six months
ended
October 31, 2009 and 2008 (unaudited)
|
F–2
|
Consolidated
Statements of Stockholders’ Deficit for the period May 1, 2008 through
October 31, 2009 (unaudited)
|
F-3
|
Condensed
Consolidated Statements of Cash Flows for the six months ended
October
31, 2009 and 2008 (unaudited)
|
F–4
|
Notes
to the Condensed Consolidated Financial Statements
|
F–5
|
2
Condensed
Consolidated Balance Sheets
October
31,
|
April
30,
|
|||||||
2009
|
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 61,269 | $ | 69,233 | ||||
Accounts
receivable, net
|
68,617 | 88,122 | ||||||
Prepaid
assets
|
15,523 | 17,280 | ||||||
Total
Current Assets
|
145,409 | 174,635 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
52,728 | 93,287 | ||||||
DEFERRED
LOAN FEES - NET
|
2,212,560 | 472,904 | ||||||
TOTAL
ASSETS
|
$ | 2,410,697 | $ | 740,826 | ||||
LIABILITIES AND STOCKHOLDERS'
DEFICIT
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable and accrued expenses
|
$ | 916,875 | $ | 702,595 | ||||
Other
payable
|
117,907 | 69,713 | ||||||
Deferred
compensation
|
62,500 | 62,500 | ||||||
Due
to related parties
|
202,465 | 202,465 | ||||||
Notes
payable, net
|
— | 5,625,120 | ||||||
Notes
payable - related party
|
183,177 | 2,293,177 | ||||||
Convertible
notes - related party, net
|
2,988,743 | — | ||||||
Total
Current Liabilities
|
4,471,667 | 8,955,570 | ||||||
NOTES
PAYABLE - LONG-TERM PORTION, NET
|
192,586 | 515,620 | ||||||
TOTAL
LIABILITIES
|
4,664,253 | 9,471,190 | ||||||
MINORITY
INTEREST
|
3,499,466 | 3,525,870 | ||||||
STOCKHOLDERS'
DEFICIT
|
||||||||
Preferred
stock, $0.001 par value; 5,000,000 shares authorized, 2,000,000 shares
issued and outstanding
|
2,000 | — | ||||||
Common
stock, $0.001 par value; 150,000,000 shares authorized, 33,554,093 shares
issued and outstanding
|
33,554 | 21,442 | ||||||
Additional
paid-in capital
|
11,989,167 | 3,335,688 | ||||||
Prepaid
consulting equity
|
(74,897 | ) | — | |||||
Accumulated
deficit
|
(17,716,377 | ) | (15,886,684 | ) | ||||
Accumulated
other comprehensive income
|
13,531 | 273,320 | ||||||
Total
Stockholders' Deficit
|
(5,753,022 | ) | (12,256,234 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ | 2,410,697 | $ | 740,826 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-1
NEW
MEDIA LOTTERY SERVICES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
For
the Three Months Ended
|
For
the Six Months Ended
|
|||||||||||||||
October
31,
|
October
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
NET
REVENUES
|
$ | 278,435 | $ | 254,884 | $ | 538,662 | $ | 591,986 | ||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Depreciation
and amortization expense
|
313,608 | 94,613 | 434,160 | 172,386 | ||||||||||||
General
and administrative
|
217,501 | 378,059 | 674,116 | 683,715 | ||||||||||||
Management
fees
|
7,500 | 19,456 | 15,000 | 41,481 | ||||||||||||
Professional
fees
|
143,922 | 183,131 | 340,136 | 350,680 | ||||||||||||
Programming
fees
|
107,874 | 143,522 | 231,984 | 339,788 | ||||||||||||
Rent
expense
|
24,845 | 24,260 | 54,533 | 50,072 | ||||||||||||
Contract
development
|
— | — | — | 3,000 | ||||||||||||
Website
expense
|
176,634 | 175,537 | 354,580 | 482,207 | ||||||||||||
Total
Operating Expenses
|
991,884 | 1,018,578 | 2,104,509 | 2,123,329 | ||||||||||||
LOSS
FROM OPERATIONS
|
(713,449 | ) | (763,694 | ) | (1,565,847 | ) | (1,531,343 | ) | ||||||||
OTHER
INCOME (EXPENSES)
|
||||||||||||||||
Gain
(loss) on sale of property and equipment
|
— | — | (52 | ) | — | |||||||||||
Interest
income
|
12 | 37 | 282 | 73 | ||||||||||||
Interest
expense
|
(78,286 | ) | (156,359 | ) | (199,844 | ) | (295,475 | ) | ||||||||
Interest
expense - beneficial conversion feature
|
(165,528 | ) | — | (324,334 | ) | — | ||||||||||
Total
Other Income (Expenses)
|
(243,802 | ) | (156,322 | ) | (523,948 | ) | (295,402 | ) | ||||||||
NET
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST
|
(957,251 | ) | (920,016 | ) | (2,089,795 | ) | (1,826,745 | ) | ||||||||
PROVISION
FOR INCOME TAXES
|
— | — | — | — | ||||||||||||
MINORITY
INTEREST IN SUBSIDIARIES LOSSES
|
121,387 | 178,196 | 260,102 | 349,900 | ||||||||||||
NET
LOSS
|
$ | (835,864 | ) | $ | (741,820 | ) | $ | (1,829,693 | ) | $ | (1,476,845 | ) | ||||
BASIC
AND DILUTED NET LOSS PER SHARE
|
$ | (0.02 | ) | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.07 | ) | ||||
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING
|
33,554,093 | 21,442,143 | 33,554,093 | 21,442,143 | ||||||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
NET
LOSS
|
$ | (835,864 | ) | $ | (741,820 | ) | $ | (1,829,693 | ) | $ | (1,476,845 | ) | ||||
Foreign
currency translation adjustment
|
(564,559 | ) | 310,804 | (259,789 | ) | 293,862 | ||||||||||
Unrealized
gain (loss) on marketable securities
|
— | (30 | ) | — | (3,000 | ) | ||||||||||
COMPREHENSIVE
LOSS
|
$ | (1,400,423 | ) | $ | (431,046 | ) | $ | (2,089,482 | ) | $ | (1,185,983 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements
F-2
NEW
MEDIA LOTTERY SERVICES, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders' Deficit
For the
period May 1, 2008 through October 31, 2009
(Unaudited)
Accumulated
|
||||||||||||||||||||||||||||||||||||
Additional
|
Other
|
|||||||||||||||||||||||||||||||||||
Preferred
Stock
|
Common
Stock
|
Paid-in
|
Prepaid
|
Accumulated
|
Comprehensive
|
Minority
|
||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Equity
|
Deficit
|
Income
|
Interest
|
||||||||||||||||||||||||||||
Balance,
April 30, 2008
|
— | $ | — | 21,442,143 | $ | 21,442 | $ | 3,335,688 | $ | — | $ | (12,923,096 | ) | $ | 107,958 | $ | 2,887,722 | |||||||||||||||||||
Consolidation
of subsidiaries
|
— | — | — | — | — | — | — | — | 638,148 | |||||||||||||||||||||||||||
Unrealized
loss on marketable securities
|
— | — | — | — | — | — | — | (3,000 | ) | — | ||||||||||||||||||||||||||
Foreign
currency translation
|
— | — | — | — | — | — | — | 168,362 | — | |||||||||||||||||||||||||||
Net
loss for the year ended April 30, 2009
|
— | — | — | — | — | — | (2,963,588 | ) | — | — | ||||||||||||||||||||||||||
Balance,
April 30, 2009
|
— | $ | — | 21,442,143 | $ | 21,442 | $ | 3,335,688 | $ | — | $ | (15,886,684 | ) | $ | 273,320 | $ | 3,525,870 | |||||||||||||||||||
Consolidation
of subsidiaries
|
— | — | — | — | — | — | — | — | (26,404 | ) | ||||||||||||||||||||||||||
Preferred
stock issued for costs related to Convertible debt
|
2,000,000 | 2,000 | — | — | 1,998,000 | — | — | — | — | |||||||||||||||||||||||||||
Common
stock issued for conversion of debt
|
— | — | 9,005,700 | 9,006 | 6,103,627 | — | — | — | — | |||||||||||||||||||||||||||
Common
stock issued for services
|
— | — | 3,106,250 | 3,106 | 162,894 | (98,500 | ) | — | — | — | ||||||||||||||||||||||||||
Valuation
of options and warrants
|
— | — | — | — | 248,273 | — | — | — | — | |||||||||||||||||||||||||||
Value
attributed to beneficial conversion features
|
— | — | — | — | 140,686 | — | — | — | — | |||||||||||||||||||||||||||
Amortization
of prepaid equity
|
— | — | — | — | — | 23,603 | — | — | — | |||||||||||||||||||||||||||
Foreign
currency translation
|
— | — | — | — | — | — | — | (259,789 | ) | — | ||||||||||||||||||||||||||
Net
loss for the period ended October 31, 2010
|
— | — | — | — | — | — | (1,829,693 | ) | — | — | ||||||||||||||||||||||||||
Balance,
October 31, 2009 - unaudited
|
2,000,000 | $ | 2,000 | 33,554,093 | $ | 33,554 | $ | 11,989,167 | $ | (74,897 | ) | $ | (17,716,377 | ) | $ | 13,531 | $ | 3,499,466 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-3
NEW
MEDIA LOTTERY SERVICES, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
For
the Six Months Ended
|
||||||||
October
31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$ | (1,829,693 | ) | $ | (1,476,845 | ) | ||
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
||||||||
Depreciation
and amortization expense
|
434,160 | 172,386 | ||||||
Loss
(gain) on disposition of assets
|
52 | — | ||||||
Common
Stock issued for services
|
91,103 | — | ||||||
Warrants
and Options granted for services
|
248,273 | — | ||||||
Accretion
of beneficial conversion feature
|
346,109 | — | ||||||
Interest
forgiven on related party notes
|
235,032 | — | ||||||
Minority
interest in subsidiaries losses
|
(260,102 | ) | (365,521 | ) | ||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
19,505 | 77,426 | ||||||
VAT
receivable
|
48,194 | (45,307 | ) | |||||
Accounts
payable and accrued expenses
|
214,283 | 355,495 | ||||||
Prepaid
assets
|
421 | 57,578 | ||||||
Net
Cash Used by Operating Activities
|
(452,663 | ) | (1,224,788 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchases
of property and equipment
|
— | (39,460 | ) | |||||
Proceeds
from sale of property and equipment
|
2,200 | — | ||||||
Net
Cash Used by Investing Activities
|
2,200 | (39,460 | ) | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
from issuance of notes payable
|
1,658,410 | |||||||
Loan
fees paid
|
(87,500 | ) | (471,011 | ) | ||||
Proceeds
from issuance of convertible notes payable, related
parties
|
635,000 | — | ||||||
Proceeds
from issuance of notes payable, related parties
|
— | 300,000 | ||||||
Payments
on notes payable, related parties
|
(70,000 | ) | (300,000 | ) | ||||
Payments
on notes payable
|
— | (345,502 | ) | |||||
Net
Cash Provided by Financing Activities
|
477,500 | 841,897 | ||||||
EFFECT
OF FOREIGN CURRENCY TRANSLATION ADJUSTMENT
|
(34,999 | ) | 300,790 | |||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(7,964 | ) | (121,561 | ) | ||||
|
||||||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
69,233 | 215,746 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 61,269 | $ | 94,185 | ||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Cash
paid for interest
|
$ | 988 | $ | 221,692 | ||||
Cash
paid for income taxes
|
$ | — | $ | — | ||||
NON-CASH
INVESTING & FINANCING ACTIVITIES:
|
||||||||
Common
stock issued for services
|
$ | 91,103 | $ | — | ||||
Common
Stock issued to convert debt
|
$ | 6,112,633 | $ | — | ||||
Warrants
and options granted for services
|
$ | 248,273 | $ | — |
The
accompanying notes are an integral part of these consolidated financial
statements
F-4
NEW
MEDIA LOTTERY SERVICES, INC. & SUBSIDIARIES
Notes to
the Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1 -
|
BASIS
OF FINANCIAL STATEMENT PRESENTATION
|
|
The
accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted in accordance with such rules and
regulations. The information furnished in the interim condensed
consolidated financial statements includes normal recurring adjustments
and reflects all adjustments, which, in the opinion of management, are
necessary for a fair presentation of such financial
statements. Although management believes the disclosures and
information presented are adequate to make the information not misleading,
it is suggested that these interim condensed consolidated financial
statements be read in conjunction with the Company’s audited financial
statements and notes thereto included in its April 30, 2009 Annual Report
on Form 10-K. Operating results for the six months ended
October 31, 2009 are not necessarily indicative of the results to be
expected for year ending April 30,
2010.
|
NOTE 2-
|
GOING
CONCERN CONSIDERATIONS
|
The
accompanying condensed consolidated financial statements have been prepared
using generally accepted accounting principles applicable to a going concern
which contemplates the realization of assets and liquidation of liabilities in
the normal course of business. As reported in its Annual Report on
Form 10-K, for the year ended April 30, 2009, the Company has incurred operating
losses of $15,886,684 (excluding minority interest and other comprehensive loss)
from inception of the Company through April 30, 2009. The Company’s
stockholders’ deficit at April 30, 2009 was
$12,256,234. Additionally, the Company has sustained additional
operating losses for the six months ended October 31, 2009 of $1,565,847, has a
working capital deficit of $4,326,259, and negative cash flows from
operations. These factors combined, raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans
to address and alleviate these concerns are as follows:
Management
is continually striving to overcome our operating losses by expanding the player
base of its various projects and thereby increasing its operating
income. The ability to expand the player base is principally
contingent on raising additional capital for marketing and new project
developments.
The
ability of the Company to continue as a going concern is dependent upon its
ability to successfully accomplish the plans described in the preceding
paragraph and eventually attain profitable operations. The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going
concern.
F-5
NEW
MEDIA LOTTERY SERVICES, INC. & SUBSIDIARIES
Notes to
the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 2-
|
GOING
CONCERN CONSIDERATIONS (Continued)
|
The
ability of the Company to continue as a going concern is dependent upon its
ability to attain profitable operations. The accompanying financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
NOTE 3-
|
MATERIAL
EVENTS
|
During
the six months ended October 31, 2009, the Company issued the following
equity securities in transactions exempt from the registration requirements of
the Securities Act of 1933, as amended, afforded by Section 4(2)
thereof:.
During
May 2009, we issued an aggregate of 300,000 shares of common stock to U-mex GmbH
for services rendered in connection with structuring a proposed offering of
securities in Germany. We also issued to U-mex options to purchase an
additional 600,000 shares of common stock. The options are
exercisable at any time through May 12, 2011, subject to the conditions
described in the following sentence. Of the options issued, 200,000
are exercisable immediately at $.30 per share, 200,000 are exercisable at $.60
per share and vest only in the event that the Company receives minimum net
proceeds from the proposed offering of €1.5 million and 200,000 are exercisable
at $.90 per share and vest only in the event that the Company receives minimum
net proceeds from the proposed offering of €2 million. The estimated
value of the compensatory common stock purchase options granted to U-mex in
exchange for services was determined using the Black-Scholes pricing
model. The Company calculated and expensed $4,278 as compensation
expense.
During
May 2009, we issued an aggregate of 500,000 shares of common stock to Thomas
Chown for services rendered in connection with structuring a proposed offering
of securities in Germany. The agreement with Mr. Chown is in effect
for a period of one year. The shares that were issued were recorded
as prepaid equity and as of October 31, 2009, $9,425 of this equity had
been expensed as consulting expense.
On May
29, 2009, the Company issued options to purchase an aggregate of 3,475,000
shares of common stock to five employees of the Company, including John Carson
and Sterling Herbst, affiliates of the Company. The options are
exercisable at a price of $.10 per share at any time through May 28,
2019. The estimated value of the compensatory common stock purchase
options granted above in exchange for services was determined using the
Black-Scholes pricing model. The amount of the expense charged to operations for
these compensatory options granted in exchange for services was $100,834 during
the six months ended October 31, 2009.
F-6
On July
23, 2009, we issued 4,502,850 shares of common stock to Milton Dresner in
consideration of the conversion of $3,230,133 in principal amount of debt and
4,502,850 shares of common stock to Joseph Dresner in consideration of the
conversion of $2,882,500 in principal amount of debt. Milton Dresner converted
at a price of $0.71735 per share and Joseph Dresner converted at a price of
$0.64015 per share. Also in connection with the conversion of their
debt, the Company issued warrants to purchase 750,000 shares of common stock to
each of Milton Dresner and Joseph Dresner. The warrants are
exercisable at a price of $.05 per share at any time through July 23,
2012. The estimated value of these compensatory common stock purchase
warrants was determined using the Black-Scholes pricing model. The amount of the
expense charged to operations for these compensatory warrants was $143,161
during the six months ended October 31, 2009.
In May
2009, the Company borrowed $60,000 from Trafalgar Capital on a short term
basis. The loan was repaid in its entirety in July 2009.
During
the six months ended October 31, 2009 the Company
entered into a $1 million credit facility, under which $575,000 was outstanding
at October 31, 2009 with
Trafalgar Capital. All draw downs under the credit facility are and
will be evidenced by Secured Convertible Redeemable Debentures ("Debentures")
that mature on July 20, 2011, at which time the credit facility expires. The
balance outstanding under each Debenture bears interest at the rate of 10% per
annum. The Company received the first draw down under the credit
facility as of July 20, 2009 in the amount of $300,000. The Company
received the second draw down under the credit facility as of August 24, 2009 in
the amount of $275,000.
We did
not make the payments to Trafalgar under any of our debt instruments that were
due by October 30, 2009, which aggregated $41,326 and €336,581. Nor
did we make any payments due on November 30, 2009, which aggregated $33,797 and
€261,407. Accordingly, as of November 30, 2009, we owed
Trafalgar the sum of $75,123 and €597,988 for past amounts due under these
instruments. Accordingly, we are in default under all of
the debt instruments to which we are a party in favor of Trafalgar. As a
consequence, Trafalgar is entitled to exercise all of its rights under the
various agreements we entered during the period June 2008 through August 2009,
including seizing all of our assets which would terminate our
operations.
The
Company analyzed the beneficial conversion feature of their debt agreements and
determined the value of the beneficial conversion feature using the intrinsic
value method. In relation to the $300,000 loan, as of October 31, 2009, the
Company recognized a beneficial conversion feature of $92,157 of which $12,734
has been accreted in the financial statements. In relation to the
$275,000 loan, as of October 31, 2009, the Company recognized a beneficial
conversion feature of $48,529 of which $9,041 has been accreted in the financial
statements.
Pursuant
to the Purchase Agreement, dated as of July 20, 2009, the Company agreed to
issue 2 million shares of convertible, redeemable preferred stock to Trafalgar
Capital Specialized Investment Fund-FIS ("Trafalgar"). On August 21,
2009, the parties agreed on the terms of the preferred stock and on that date,
the Company filed a certificate of designation with the State of Delaware
setting forth the terms and restrictions of the Series A Convertible Preferred
Stock ("Series A Preferred Stock") to be issued to Trafalgar. On
August 24, 2009, the Company issued 2 million shares of Series A Preferred
Stock, with an initial stated value of One Dollar ($1.00), to Trafalgar pursuant
to the exemption from the registration requirements of the Securities Act of
1933, as amended, afforded by Section 4(2) thereof. The Company
valued the preferred shares at $2 million and capitalized this expense as a loan
cost which will be amortized over the life of the convertible debt agreement –
24 months.
F-7
NEW
MEDIA LOTTERY SERVICES, INC. & SUBSIDIARIES
Notes to
the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 4 -
SUBSEQUENT EVENTS
By
agreement dated November 2, 2009, the Company borrowed the sum of $50,500 from
Trafalgar. After deducting Trafalgar's transactional expenses, we
received the sum of $45,500 from this loan. We have agreed to repay
this loan without interest by remitting to Trafalgar all proceeds earned by us
under our agreement with Inspired Broadcast Networks, pursuant to which we
provide games for its server based gaming terminals utilized by our client,
Rehab-Ireland, which has agreed to deliver the fee owed to us directly to
Trafalgar's account until the entire principal amount of the loan is
repaid. We are using the proceeds from this loan for working
capital.
F-8
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operation.
Forward
Looking Statements
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Report contain forward-looking statements
within the meaning of the Securities Litigation Reform Act of 1995 that are
based on current expectations, estimates and projections about our business,
management’s beliefs, and assumptions made by management. Words such as
“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
“should,” “could”, and variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve risks and uncertainties that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements due to numerous factors including:
·
|
our
ability to obtain capital to repay our debt and fund ongoing operations
and expansion;
|
·
|
our
ability to fully implement our business
plan;
|
·
|
our
ability to take advantage of new business opportunities as they
arise;
|
·
|
general
economic and business conditions, both nationally and in our
markets;
|
·
|
the
effect of government regulation on our industry in each country in which
we conduct business;
|
·
|
the
impact of competition;
|
·
|
the
risks of doing business in foreign
countries;
|
·
|
anticipated
trends in our business; and
|
·
|
other
risks discussed from time to time in our other Securities and Exchange
Commission filings and reports, including our Annual Report on Form 10-K
for the year ended April 30,
2009.
|
In
addition, such statements could be affected by general industry and market
conditions and growth rates, and general domestic and international economic
conditions. Such forward-looking statements speak only as of the date on which
they are made and we do not undertake any obligation to update any
forward-looking statement to reflect events or circumstances after the date of
this Report.
Overview.
New Media
Lottery Services, Inc. (the “NM-US”), through its direct and indirect
subsidiaries, New Media Lottery Services plc (“NM-PLC”) and New Media Lottery
(International) Services Ltd. (“NMLS-LTD” and collectively, with NM-US and
NM-PLC, “we”, “us,” "our" or the “Company”), designs, builds, implements,
manages, hosts and supports web, kiosk and wireless device based lottery
programs operated by governments and charitable organizations outside of the
United States. We commenced providing services to clients in August 2003 and
began generating revenues from long-term agreements with our clients during the
2006 fiscal year. We also develop and provide lottery products and content to
Internet-based kiosks for third parties.
3
Our
business is highly regulated and the competition to secure new contracts is
intense. All of our clients are outside the United
States. In addition, substantially all of our assets, primarily
consisting of equipment we use to operate online lottery systems for our
customers, are held outside of the United States. Accordingly, we are
subject to all of the risks of international operations, including increased
governmental regulation of the online lottery industry in the markets where we
operate or propose to operate; exchange controls or other currency restrictions
and exchange rate risks; and political instability.
Summary
Results of Operations and Financial Condition.
Our financial condition and operations
continue to be afflicted by a lack of cash to expand our
business. During the last fiscal quarter, our revenue from operations
increased slightly and we continued to cut expenses; thus, our loss from
operations decreased compared to the prior quarterly period. However,
we expect that our expenses will continue to exceed our revenues for the
foreseeable future. We applied the proceeds from the $275,000 loan we
received during the last quarter, from which we received the net amount of
$227,500, to satisfy our ongoing expenses and, consequently, could not allocate
any cash to business development or to increase marketing of our client's bingo
Web site.
As of
October 31, 2009, we were indebted to Trafalgar Capital Specialized Investment
Fund-FIS ("Trafalgar"), our largest stockholder, in the principal amounts of
$575,000 and €2,211,111 under the terms of four debt instruments. On
October 30, 2009, the Company was required to commence repaying a portion of the
amount due under these instruments. The Company did not make the
payments due on October 30, 2009 or November 30, 2009. Consequently,
during the quarter ended October 31, 2009 and in the subsequent period through
the date of this report, the Company has been in default under the terms of
these debt instruments and the related agreements with Trafalgar. The
Company currently does not possess sufficient cash to make the payments required
under these instruments. A further discussion of the Company's
obligations under the various loan documents and the consequences of the default
is included under the heading "Capital Resources and Existing Obligations,"
below, and under "Part II, Item 3. Defaults Upon Senior
Securities."
Second
Quarter Operations
In view
of our lack of cash, we continue to seek to expand our operations through the
most efficient and least expensive modalities available. We continue
to develop partnerships with well-known entities to link to our client's bingo
Web site and gain access to their existing Web site visitors. We also
are endeavoring to create new software and games for use on new media devices,
which are relatively inexpensive to develop compared to the full-scale bingo and
lottery venture we are operating in Ireland.
During
the second fiscal quarter, we continued to focus our efforts on the growth and
implementation of programs to expand the reach of Rehab Ireland's site, within
Ireland, the United Kingdom and beyond, to acquire new players. Our
business is built upon the number of players that deposit funds and play games
on our client's site. Our objective is to acquire new players at the
lowest cost per player. The internet provides an effective means of
achieving this goal, both by way of sites we maintain and through partnerships
with high-traffic sites maintained by third parties. Our efforts have
been directed at establishing partnerships with well-known brands and
organizations that operate Web sites with high user
traffic. Partnerships either take the form of "white label" sites or
"affiliate programs."
4
A typical
"white label" program entails our partner's Web site linking to a Web page which
we develop, allowing its customers to play games offered by our lottery client.
The linked page retains the atmosphere of the partner's branded Web site,
allowing users to feel that they have not left the sponsor's home
site. Essentially, our gaming site is rebranded to appear as the
partner’s offering. Players enroll, deposit funds, wager and collect
winnings exactly as players on our client's Web site. Players
directed to the white label site from our partner's Web site are playing the
same games being played by customers on our client's web site in the same "room"
(the Web page on which a particular game is played). The more players
in the playing room, the larger and more attractive the potential
prizes. Players from many white label sites may be playing in the
same room without being aware of that fact because they feel as if they have not
left the sponsor's Web site. Compensation arrangements typically comprise the
payment of a monthly fee to a partner as well as a percentage of the revenues
derived from players originating from a partner's white label site.
We
currently have established white label programs with such companies as The Irish
Post newspaper in the UK (the voice of the Irish in Britain) to service the
expansive Irish ex-patriot community in the UK; and Pigsback, Ireland’s leading
consumer networking site. This quarter we secured a channel
partnership agreement with Eircom, Ireland’s largest telecommunications
company. Eircom.net is Ireland’s highest trafficked site with over 24
million page impressions monthly. We previously had been party to a
white label agreement with TV3, Ireland’s leading independent television
station, to provide our client's content to its popular and award-winning web
site but discontinued the program because TV3 was not delivering the player
volumes we required.
We enter
into affiliate programs with niche/vertical content driven web sites that have
similar target audience/customers whereby our affiliates create a hyperlink on
their page that points to our lottery client's Web page. These links
have begun to drive traffic to our site and compete very competitively in the
market place. In addition we have developed feeder programs with social networks
such as Facebook which has proven beneficial.
White
label and affiliate programs in partnership with third parties allow us to
leverage our partners' customers and acquire players at a significantly lower
cost than direct advertising. The programs offer our partners access
to our games and services, essentially our client’s government gaming license,
and allows them to widen their product offering and create a better
cross-selling platform for their own products or services without having to
invest in creating the technology and infrastructure itself. The
program allows all parties to leverage and monetize the partner's existing
customer base for an additional revenue stream.
During the quarter, we developed
software modifications for Inspired Gaming Group's server based gaming
terminals. We are advised these modifications were requested by
distributors and hope that our efforts will accelerate the deployment of the
terminals over the next several fiscal quarters. The Company is advised by
Inspired that it placed approximately 80 new terminals in establishments
throughout Ireland during the last quarter and that Inspired currently is
operating approximately 180 terminals.
We
continue to negotiate with the officials in a mid-European country to win a
contract to operate a national lottery program but cannot state with any
certainty whether our efforts will be successful.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We evaluate our estimates on an on-going
basis. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under
different assumptions or conditions. For a description of our
critical accounting policies and related judgments and estimates that affect the
preparation of our condensed consolidated financial statements, we refer readers
to footnote 2 titled "Critical Accounting Policies" appearing on page F-8 of our
audited financial statements included in our April 30, 2009 Annual
Report on Form 10-K, as filed with the SEC on August 13,
2009.
5
Recent
Accounting Pronouncements
We refer
readers to footnote 2 titled "Recent Accounting Developments" appearing on page
F-9 of our audited financial statements included in our April 30, 2009 Annual
Report on Form 10-K, as filed with the SEC on August 13,
2009.
Liquidity
and Capital Resources.
Sources
and Uses of Cash
Liquidity is the ability of a company
to generate adequate amounts of cash to meet its needs for cash. Over
the last fiscal quarter our principal sources of liquidity consisted of cash
provided from related party loans and operating cash flow. Our
principal uses of cash generally include payroll and related expenses, marketing
expenses and professional fees. Information regarding our cash flows for the
three months ended October 31, 2009 is presented in our condensed
consolidated statements of cash flows contained in this Form 10-Q and is further
discussed below.
The table
below presents certain selected balance sheet comparisons as of October 31, 2009
and April 30, 2009 which we believe demonstrate our liquidity position as of
October 31, 2009.
(All amounts are set forth in US
Dollars.)
31-Oct-09
|
30-Apr-09
|
$
Difference
|
%
Difference
|
|||||||||||||
(Unaudited)
|
(Audited)
|
|||||||||||||||
Working
Capital (deficit)
|
(4,326,259 | ) | (8,780,935 | ) | 4,454,676 | 51 | % | |||||||||
Cash
|
61,269 | 69,233 | (7,964 | ) | -12 | % | ||||||||||
Accounts
receivable
|
68,617 | 88,122 | (19,505 | ) | -22 | % | ||||||||||
Prepaid
assets
|
15,523 | 17,280 | (1,757 | ) | -10 | % | ||||||||||
Total
Current Assets
|
145,409 | 174,635 | (29,226 | ) | -17 | % | ||||||||||
Property
and Equipment
|
52,728 | 93,287 | (40,559 | ) | -43 | % | ||||||||||
Deferred
Loan Fees
|
2,212,560 | 472,904 | 1,739,656 | 368 | % | |||||||||||
Total
Assets
|
2,410,697 | 740,826 | 1,669,871 | 225 | % | |||||||||||
Accounts
payable and Accrued
expenses
|
916,875 | 702,595 | 214,280 | 30 | % | |||||||||||
Total
Current Liabilities
|
4,471,667 | 8,955,570 | (4,483,903 | ) | -50 | % | ||||||||||
Total
Liabilities
|
4,664,253 | 9,471,190 | (4,806,937 | ) | -51 | % |
At
October 31, 2009, the Company’s cash and accounts receivable equaled $129,886 in
available resources to fund $916,876 in accounts payable and accrued
expenses. While we expect Rehab Bingo and the Inspired project
to generate increasing amounts of cash to partially fund operations, expenses
will continue to exceed revenues for the foreseeable
future. Additional sources of cash will be necessary immediately to
fund the cash shortfall and satisfy our obligations to Trafalgar.
During
the six months ended October 31, 2009, we converted of $6,112,633 of debt by
Milton Dresner and Joseph Dresner into shares of our common stock which
significantly reduced our total liabilities and recorded over $2
million of deferred loan fees as an asset on our financial statements, of
which $2 million represents the value of the of preferred stock we issued to our
lender as additional consideration for the loan. While these
transactions have improved our financial condition, they do not enhance our
ability to operate our business or satisfy our other outstanding
obligations
6
We
recorded a significant reduction in our liabilities as a result of the
conversion of an aggregate of $6,112,633 of the principal amount of debt owed to
Milton Dresner and Joseph Dresner by the Company into shares of the common stock
of NM-US.
We
continue to seek to trim expenditures in the interest of retaining
cash. For example, we reduced our staff by five persons and the
remaining management and staff accepted a 10%-20% cut in salary. We
also decreased website expenses during 2010, consisting primarily of
advertising, by 26%, compared to the first six months of fiscal
2009.
As noted
in the table above, at October 31, 2009, we had a working capital (current
assets minus current liabilities) deficit of $4,326,259 as compared to a deficit
of $8,780,935 as of April 30, 2009 (our fiscal year end). The
increase in working capital is a result of conversion of debt to stockholders
equity.
Net cash
used by operating activities in the first six months of fiscal 2010 was
$452,663, a decrease of $772,125 from the comparable prior year's
period. The decrease is a result of an increase non-cash expense
items.
Net cash
provided by investing activities in the first six months of fiscal 2010 was
$2,200. Capital expenditures are expected to be minimal in the
remainder of 2010.
Net cash
provided by financing activities in the first six months of fiscal 2010 was
$477,500, which resulted exclusively from $635,000 of loans from
Trafalgar. The Company paid $87,500 in loan fees while repaying
$70,000 in loans to related parties.
Capital
Resources and Existing Obligations.
The table
below presents our financial obligations and commercial commitments as of
October 31, 2009, for each of the ensuing four quarters and the total amount of
our financial obligations and commercial commitments thereafter. The
table does not reflect the fact that the Company failed to pay amounts due under
instruments evidencing four loans prior or subsequent to October 31, 2009 and
the possibility of that the lender could, at any time, call a default under such
instruments, which has not occurred as of the date of this
Report. Euro amounts have been converted using the applicable rate
for October 31, 2009.
Contractual
Cash Obligations
|
At
October 30, 2009
|
At
January 31, 2010
|
At
April 30, 2010
|
At
July 31, 2010
|
At
October 31, 2010
|
After
October 31, 2010
|
||||||||||||||||||
Capital
Leases
|
-0- | -0- | -0- | -0- | -0- | -0- | ||||||||||||||||||
Operating
Leases
|
$ | 50,078 | $ | 42,633 | $ | 25,467 | $ | 21,888 | $ | 21,888 | $ | 92,431 | ||||||||||||
Loans
Payable
|
$ | 539,668 | $ | 1,225,332 | $ | 1,233,794 | $ | 766,311 | $ | 546,517 | $ | 286,736 | ||||||||||||
Total
Contractual Cash
Obligations
|
$ | 589,746 | $ | 1,297,965 | $ | 1,259,261 | $ | 798,199 | $ | 568,405 | $ | 379,167 |
7
At
October 31, 2009, our available cash, receivables and liquid assets totaled
$145,409. As noted in the table above, we have total outstanding debt (all owed
to Trafalgar) in the principal amount of $575,000 and €2,211,111. On
October 30, 2009, we were required to commence redeeming all of the debentures
we issued to Trafalgar (June 2008, October 2008 and two in August 2009), by
redeeming a specified monthly amount and paying accrued interest and a
redemption premium. At October 30, 2009, we were required to repay the sums of
$41,326 and €336,581 under the debt instruments. At November 30,
2009, we were required to repay the sums of $33,797 and
€261,407. Accordingly, as of November 30, 2009, we owed
Trafalgar the principal sums of $75,123 and €597,988 for past amounts due under
the debt instruments. Currently, we do not have the cash to pay
the past due amounts. We do not anticipate having cash available to
pay the future amounts due and we are operating under the specter that Trafalgar
could exercise its rights under the various security arrangements available to
it by, among other things, seizing all of our assets, which would cause us to
cease our operations.
We have
limited capital resources and our operations to date have been funded primarily
with the proceeds from the sale of equity in NM-PLC and debt
financings. We have available to us $425,000 under a $1 million line
of credit created by Trafalgar, on which we currently are in default; however,
the obligation to extend credit to us under the line is at Trafalgar's sole
discretion and we cannot be certain they will make any further funds available
to us thereunder. Subsequent to the quarter ended October
31, 2009, Trafalgar loaned us the sum of $50,500, which we have used to satisfy
our ongoing obligations, as more fully described under the heading "Subsequent Events – Receivables
Financed Loan" below.
We
anticipate that our existing capital resources will enable us to continue
operations for a very limited period of time unless unforeseen events arise that
positively impact our liquidity or allow us to continue operating beyond our
expectations. We expect that we will apply any cash we generate or
financing we receive to the payment of outstanding borrowings and ongoing
expenses. The development and implementation of new lotteries is
capital intensive and we do not possess sufficient capital to pursue or develop
new opportunities, if presented to us.
Our
current financial condition raises substantial doubt about our ability to
continue as a going concern. Consequently, the audit report prepared by our
independent public accounting firm relating to our financial statements for the
year ended April 30, 2009 included a going concern explanatory
paragraph.
We must
identify an immediate significant source of capital to fund our operations,
including the repayment of our substantial debt and the development of new
sources of revenue. We have not identified any other sources of capital and, in
light of our financial condition, we may not.
Financing
Activities During the Last Quarter.
During
the last fiscal quarter, we drew-down the sum of $275,000 from our line of
credit extended by Trafalgar, which borrowing is evidenced by a Secured
Convertible Debenture dated August 24, 2009. The Debenture bears interest at the
rate of 10% per annum and matures on July 20, 2011. A more complete description
of the line of credit and the terms of the Secured Convertible Debenture and the
other transactional documents governing the loan is included in our Quarterly
Report on Form 10-Q for the period ended July 31, 2009 (the "July 2009 10-Q").
Under the debenture, we are obligated to redeem a specified amount of the
principal outstanding under the debenture in each month and to pay accrued
interest thereon along with a redemption premium equal to 12.5% of the amount
redeemed.
We were
unable to make the monthly payments in either October or November under this
debenture or under any of the other debt instruments in favor of Trafalgar.
Consequently, as of November 30, 2009, we owed an aggregate of $75,123 and
€597,988 for past amounts due under the debt instruments
8
Results
of Operations
Three
Months Ended October 31, 2009 Compared to the Three Months Ended October 31,
2008
During
the three months ended October 31, 2009, we recorded revenues of $278,435 on net
losses after minority interest of $835,864 as compared to revenues of $254,884
on losses after minority interest of $741,820 for the second quarter of fiscal
2009.
We
continue to develop the electronic lottery and bingo platforms that we can
migrate among our clients. Our operating expenses decreased by $26,694, or 3%,
over the three month period ended October 31, 2008. The decrease in tangible
operating expenses in the last quarter compared to the second quarter of 2009
comprised primarily a decrease in general and administrative expenses, a
decrease in professional fees and a decrease in programming fees realized from
lay-offs of employees earlier in the fiscal year. We continue to incur costs in
connection with the development of gaming software, marketing of our client’s
bingo website and general and administrative expenses. During the three months
ended October 31, 2009, our cash position has diminished by $57,005 from July
31, 2008.
Six
Months Ended October 31, 2009 Compared to the Six Months Ended October 31,
2008
For the
six months ended October 31, 2009, our net revenues decreased by $53,324 to
$538,662, or about 9% over the six months ended October 31, 2008, on net losses
after minority interest of $1,829,693, compared to net losses after minority
interest of $1,476,845 for the six months ended October 31, 2008. The
Company used $452,663 in cash for operating activities, leaving $61,269 in cash
at October 31, 2009.
At
October 31, 2009, the Company’s cash and accounts receivable equaled $129,886 in
available resources to fund $916,875 in accounts payable and accrued
expenses. While Rehab Bingo and revenue we earn under our agreement
with Inspired should continue to generate cash to partially fund our operations,
our expenses will exceed our revenues for the foreseeable
future. Additional sources of cash will be necessary in fiscal year
2010 to fund the cash shortfall. The Company will need to refinance
more than $3.8 million (principal amount) debt in calendar year
2010. As of October 31, 2009, current liabilities exceeded current
assets by $4,326,259.
Operating
expenses decreased by $18,820 to $2,104,509, representing a nominal decrease
from the six months of the last fiscal period. The Company reported
increases in depreciation and amortization expenses, but decreased its website
expenses and programming expenses. The significant increase in
amortization costs was a result of the loan cost amortization.
Off
Balance Sheet Arrangements
We are
not party to any off balance sheet arrangements.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
Item
4. Controls and Procedures.
Not
applicable.
9
Item
4(T). Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Our
management is responsible for establishing and maintaining disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 as amended (the “Exchange Act”)), designed to ensure that
information we are required to disclose in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer’s management,
including its principal executive officer or officers and principal financial
officer or officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
As of
October 31, 2009, the Company’s management carried out an evaluation, under the
supervision and with the participation of the Company’s Chief Executive Officer,
who is the Company’s principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under
the Exchange Act), pursuant to Exchange Act Rule 13a-15. Based on such
evaluation, the Company’s Chief Executive Officer has concluded that the
Company's disclosure controls and procedures were effective.
Changes in Internal
Controls
There
have been no changes in the Company’s internal control over financial reporting
(as defined in Rules 13a-15 and 15d-15 under the Exchange Act) during the three
months ended October 31, 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART
II — OTHER INFORMATION
Item
1. Legal Proceedings.
As of
October 31, 2009, we were not party to any litigation or other legal
proceeding.
Item
1A. Risk Factors.
Smaller
reporting companies are not required to provide the information required by this
item. Please see our Annual Report on Form 10-K as filed with the SEC
on August 13, 2009 for a discussion of the risk factors we believe affected our
Company as of April 30, 2009. In addition to those risk factors
(noting that we have no obligation to update them in this Report), we ask
investors to consider the following risk factors existing as of October 31,
2009:
We
currently are in default under the terms of four debt instruments for failing to
make payments when due, though the lenders have not yet declared us to be in
default under these instruments.
We are
party to four convertible loan agreements made in favor of
Trafalgar. Of these loans, two are denominated in US Dollars, under
which we owe the principal amount of $575,000, and two are denominated in Euros,
under which we owe the aggregate current principal amount of €2,211,111. The
amounts due under these agreements are secured by a lien on all of the assets of
each constituent entity comprising the Company. We failed to make any
of the payments due under these instruments on either October 31, 2009 ($41,326
and €336,581) or November 30, 2009 ($33,797 and €261,407) and have a past
aggregate amount due to Trafalgar under these instruments of $75,123 and
€597,988.
10
Our
failure to make payments under the Trafalgar debt instruments when due triggers
Trafalgar's rights under the security agreements and other documents governing
the loans. As of the date of this Report, Trafalgar has not declared a default
under any of the loan documents and we cannot be certain when or if it will call
a default under any of the transaction documents.
If
Trafalgar were to declare a default and exercise all of its rights under the
loan documents, including seizing all of our assets, we could be required to
liquidate our operations which would result in a loss to our stockholders of the
entire amount of their investment in our Company.
Our
financial condition is precarious and we have no access to capital to repay our
debt or fund our current or ongoing operations. Unless we can secure
additional capital and renegotiate the terms of our outstanding debt, we may be
required to discontinue our operations at any time.
As of
October 31, 2009, we had cash and accounts receivable of $129,886, owed
$3,364,506 (net of discounts) under the terms of debt instruments and had a
negative working capital of $4,326,259. Our monthly expenses
exceed our monthly revenue. We have $425,000 of credit available to
us under a line of credit extended by Trafalgar, but the decision to extend such
credit is at Trafalgar's sole discretion and we cannot be certain that it will
continue to make funds available to us. We have not identified other
sources of capital and it is unlikely, given our current financial condition,
that we will secure any additional credit or capital. Given our
current and anticipated near-term expenses, we believe that our available cash
and cash equivalents will be sufficient to enable us to continue operations for
a limited period of time, unless events arise that positively impact our
liquidity or unless we experience a significant increase revenues or locate
another source of capital, neither of which is likely. If we
discontinue operations, investors will lose the entire amount of their
investment in our Company.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a)
During the three months ended October 31, 2009, we did not issue any equity
securities that were not registered under the Securities Act of 1933, as
amended.
(b) N/A
(c)
N/A
Item
3. Defaults Upon Senior Securities.
As more
fully described in our Quarterly Report on Form 10-Q for the period ended
January 31, 2009 (the "January 2009 10-Q"), during June and October 2008, NM-PLC
borrowed an aggregate of €2.45 million principal amount from Trafalgar Capital
Specialized Investment Fund-FIS (Trafalgar) in two tranches. The
parties entered into a series of agreements evidencing each loan, including a
Convertible Loan Agreement, a deed of Debenture and security agreement and a
Pledge Agreement under which we pledged all of the shares we owned in NM-LTD to
Trafalgar. In addition, NM-LTD executed a debenture and security
agreement and a guaranty in favor of Trafalgar on January 26,
2009. Under these agreements, the loan made in June 2008 matured in
May 2010 and the loan made in October 2008 matured in April 2010. The
loans were repayable on a monthly basis in accordance with our obligation to
redeem a specified amount in each month.
11
NM-PLC
failed to make the payments of principal under the June and October 2008 loan
agreements due on December 31, 2008 and, consequently, we were in default under
each of the agreements.
As
further described in the January 2009 10-Q, the parties entered into a series of
agreements in March 2009 in order to cure the defaults, including, among others,
a Restructuring Agreement under which payments during the period beginning on
December 30, 2008 through June 30, 2009 would be deferred and recommence as of
July 31, 2009 in the amounts provided for in the agreement. In
addition, Trafalgar extended the final maturity date of the October 2008 loan
from April 30, 2010 to October 31, 2010. In addition, NM-US entered
into a Pledge Agreement in favor of Trafalgar under which it pledged all of the
common shares it owned in NM-PLC to Trafalgar, and a Corporate Guaranty under
which NM-US guaranteed all amounts owing by each of NM-PLC and
NM-LTD. In addition, Milton Dresner and Joseph Dresner, the principal
stockholders of the Company, agreed to transfer an aggregate of 9,005,700 shares
of NM-US common stock registered in their names to Trafalgar so that after the
transfer, Trafalgar would own approximately 42% of the outstanding shares of
NM-US.
As more
fully described in our Quarterly Report on Form 10-Q for the period ended July
31, 2009 (the "July 2009 10-Q"), on July 20, 2009, the Company and Trafalgar
entered into a letter agreement under which Trafalgar agreed to make available a
$1 million working capital line of credit through the purchase of convertible
debentures from the Company. As a material inducement for Trafalgar
to enter into this agreement, the Company agreed to issue to Trafalgar 2,000,000
shares of preferred stock having a stated value of $1.00, the terms of
which are described in the July 2009 10-Q.
The
Company entered into a series of agreements with Trafalgar dated as of July 20,
2009, including a Securities Purchase Agreement, a Secured Convertible
Redeemable Debenture in the principal amount of $300,000 and a Security
Agreement, under which Trafalgar agreed to make available to the Company credit
in the amount of up to $1 million for a period of two years ending on July 20,
2011, with each borrowing thereunder to be evidenced by a Secured Convertible
Redeemable Debenture. The material terms of the debentures and the
other transaction documents are described in the Company's July 2009
10-Q.
As of
July 20, 2009, Trafalgar agreed to further defer and also restructure the
payments due under the June 2008 and October 2008 loan documents, which
obligations resumed as of October 30, 2009, on which date and in each month
thereafter until they mature, in May 2010, in the case of the June 2008
debenture and October 31, 2010, in the case of the October 2008
debenture, the Company is required to redeem a specified portion of the
principal amount of the debenture and to pay Trafalgar applicable accrued
interest on the outstanding balance as of such payment date plus a redemption
premium on the principal amount redeemed.
As of
October 31, 2009, Trafalgar had loaned the Company an aggregate of $575,000
pursuant to the terms of the Securities Purchase Agreement, which sum is
evidenced by debentures dated as of August 13, 2009 (effective as of July 20,
2009) and August 24, 2009 in the principal amounts of $300,000 and $275,000,
respectively.
Commencing
on October 30, 2009 and each month thereafter through the maturity date (July
20, 2011), the Company is required to "redeem" (repay) a certain specified
portion of the outstanding principal amount of each of the debentures plus
applicable accrued interest and a redemption premium on the principal amount
redeemed. In addition, upon the completion of any capital raise in
excess of $1,000,000, all unpaid principal not as yet redeemed and accrued but
unpaid interest under outstanding debentures plus the applicable redemption
premium (as described below) on the amount redeemed will become immediately due
and payable. The principal amount of the Debenture, plus accrued interest
thereon, is convertible, in whole or in part, into shares of NM-US common
stock
12
Upon any
default under a Debenture, Trafalgar may accelerate full repayment of all
Debentures outstanding and accrued interest thereon or may convert all
Debentures outstanding and accrued interest thereon into shares of common
stock. In addition, Trafalgar would be entitled to exercise its rights
under the terms of a Security Agreement, under which the Company pledged to
Trafalgar and granted a security interest in and to all of its property (broadly
defined) during such time as any of its obligations under the various
transaction documents had been paid in full.
We did
not make the payments to Trafalgar under any of our debt instruments that were
due by October 30, 2009, which aggregated $41,326 and €336,581. Nor
did we make any payments due on November 30, 2009, which aggregated $33,797 and
€261,407. Accordingly, as of November 30, 2009, we owed
Trafalgar the sum of $75,123 and €597,988 for past amounts due under these
instruments. Accordingly, we are in default under all of
the debt instruments to which we are a party in favor of Trafalgar. As a
consequence, Trafalgar is entitled to exercise all of its rights under the
various agreements we entered during the period June 2008 through August 2009,
including seizing all of our assets which would terminate our
operations.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
Item
5. Other Information.
Related
Party Transactions
Sale of Secured Convertible
Redeemable Debenture.
As
described above under "Item 3. Defaults Upon Senior Securities" and in the July
2009 10-Q, during the last fiscal quarter we sold a Secured Convertible
Redeemable Debenture in the principal amount of $275,000 pursuant to the terms
of the Securities Purchase Agreement dated as of July 20, 2009.
We were
required to commence redeeming a portion of the principal amount of this
debenture, beginning on October 30, 2009 in an aggregate amount of $12,056, plus
applicable accrued interest on the outstanding balance as of such payment date
and the applicable redemption premium. We were unable to make
the payments due and, accordingly, we are in default under these instruments. As
a consequence, Trafalgar is entitled to exercise all of its rights under the
various agreements we entered during the period June 2008 through August 2009,
including seizing all of our assets. Please see "Part II
– Item 3. Defaults Upon Senior Securities" for a more complete
discussion of the debentures and our default thereunder and under certain other
debt instruments we executed in favor of Trafalgar.
Subsequent
Events – Receivables Financed Loan
By
agreement dated November 2, 2009, we borrowed the sum of $50,500 from
Trafalgar. After deducting Trafalgar's transactional expenses, we
received the sum of $45,500 from this loan. We have agreed to repay
this loan without interest by remitting to Trafalgar all proceeds earned by us
under our agreement with Inspired, pursuant to which we provide games for its
server based gaming terminals utilized by our client, Rehab-Ireland, which has
agreed to deliver the fee owed to us directly to Trafalgar's account until the
entire principal amount of the loan is repaid. We are using the
proceeds from this loan for working capital.
13
Item
6. Exhibits.
(a)
Exhibits.
Exhibit No.
|
Description
|
|
31.1
|
Certification
of the Company’s Principal Executive Officer and Principal Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of the Company’s Principal Executive Officer and Principal Financial
Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the
Sarbanes Oxley Act of
2002.
|
14
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NEW
MEDIA LOTTERY SERVICES, INC.
|
|||
Date:
December 21, 2009
|
By:
|
/s/ John T.
Carson
|
|
Name:
|
John
T. Carson,
|
||
Title:
|
President,
Principal Executive Officer and Principal Financial
Officer
|
15