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EX-99.2 - CITY LANGUAGE EXCHANGE INC | v176712_ex99-2.htm |
EX-99.1 - CITY LANGUAGE EXCHANGE INC | v176712_ex99-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K/A
(Amendment
No. 1)
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of
report (Date of earliest event reported) February 25,
2010
Game
Trading Technologies, Inc.
|
(Exact
Name of Registrant as Specified in
Charter)
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Delaware
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333-141521
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20-5433090
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|
(State or Other Jurisdiction
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(Commission
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(IRS Employer
|
||
of Incorporation)
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File Number)
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Identification No.)
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10957 McCormick Road, Hunt Valley, Maryland
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21031
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|||
(Address of Principal Executive Offices)
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(Zip Code)
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|||
Registrant’s
telephone number, including area code: (410)
316-9900
Copies
to:
Gregory
Sichenzia, Esq.
Stephen
A. Cohen, Esq.
Sichenzia
Ross Friedman Ference LLP
61
Broadway, 32nd Floor
New York,
New York 10006
Phone:
(212) 930-9700
Fax:
(212) 930-9725
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
¨
|
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
|
¨
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
¨
|
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17
CFR 240.14d-2(b))
|
¨
|
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
(17
CFR 240.13e-4(c))
|
CURRENT
REPORT ON FORM 8-K
GAME
TRADING TECHNOLOGIES, INC.
FEBRUARY
25, 2010
TABLE
OF CONTENTS
Page
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Item
1.01
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Entry
into a Material Definitive Agreement
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2
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Item
2.01
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Completion
of Acquisition or Disposition of Assets
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6
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Item
3.02
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Unregistered
Sales of Equity Securities
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42
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Item
4.01
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Changes
in Registrant’s Certifying Accountant
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44
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Item
5.01
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Change
in Control of Registrant
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44
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Item
5.02
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Departure
of Directors or Principal Officers; Election of Directors;
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|||
Appointment
of Principal Officers; Compensatory Arrangements of Certain
Officers
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44
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|||
Item
5.03
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Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year
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44
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Item
9.01
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Financial
Statements and Exhibits
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45
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Signatures
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47
|
i
The
Registrant hereby amends its Current Report on Form 8-K dated February 25, 2010,
filed with the Securities and Exchange Commission on March 2, 2010 (the
"Original Form 8-K"), to (i) amend Item 1.01 to correct the number of options
that have been issued upon consummation of the merger and private placement; and
(ii) to amend Item 2.01 and restate in its entirety the Security Ownership table
set forth on page 37, (iii) to amend Item 5.03 to include disclosure
regarding the amendment to the Company’s bylaws increasing the size of the board
of directors to five members (iv) correct a line item set forth on Exhibit 99.1
which was inadvertently labeled “Net Loss” instead of “Net Income” and include
in its entirety the audited financial statements of Gamers Factory, Inc. for the
years ended December 31, 2009 and 2008 set forth in Exhibit 99.1 and (v) amend
and restate in its entirety the pro forma financial statements included in
Exhibit 99.2. The Original Form 8-K is hereby restated as set forth
below.
Cautionary
Language Regarding Forward-Looking Statements and Industry Data
This
report contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties,
many of which are beyond our control. Our actual results could differ
materially and adversely from those anticipated in such forward-looking
statements as a result of certain factors, including those set forth in this
report. Important factors that may cause actual results to differ
from projections include, but are not limited to, for example:
● adverse
economic conditions,
● inability
to raise sufficient additional capital to operate our business,
● unexpected
costs, lower than expected sales and revenues, and operating
defects,
● adverse
results of any legal proceedings,
● the
volatility of our operating results and financial condition,
● inability
to attract or retain qualified senior management personnel, and
● other
specific risks that may be referred to in this report.
All
statements, other than statements of historical facts, included in this report
regarding our strategy, future operations, financial position, estimated revenue
or losses, projected costs, prospects and plans and objectives of management are
forward-looking statements. When used in this report, the words
“will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,”
“project,” “plan” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements speak only as
of the date of this report. We undertake no obligation to update any
forward-looking statements or other information contained
herein. Stockholders and potential investors should not place undue
reliance on these forward-looking statements. Although we believe
that our plans, intentions and expectations reflected in or suggested by the
forward-looking statements in this report are reasonable, we cannot assure
stockholders and potential investors that these plans, intentions or
expectations will be achieved. We disclose important factors that
could cause our actual results to differ materially from its expectations under
“Risk Factors” and elsewhere in this report. These cautionary
statements qualify all forward-looking statements attributable to us or persons
acting on our behalf.
Information
regarding market and industry statistics contained in this report is included
based on information available to us that we believe is accurate. It
is generally based on academic and other publications that are not produced for
purposes of securities offerings or economic analysis. Forecasts and
other forward-looking information obtained from these sources are subject to the
same qualifications and the additional uncertainties accompanying any estimates
of future market size, revenue and market acceptance of products and
services. We have no obligation to update forward-looking information
to reflect actual results or changes in assumptions or other factors that could
affect those statements, except as required by federal securities
laws. See “Risk Factors” for a more detailed discussion of
uncertainties and risks that may have an impact on our future
results.
- 1
-
Item
1.01
|
Entry
into a Material Definitive
Agreement.
|
On
February 25, 2010, we completed a “reverse acquisition” transaction, in which we
entered into a securities exchange agreement (the “Exchange Agreement”) with
Gamers Factory, Inc., a Maryland corporation (“Gamers” or the “Company”) and for
certain limited purposes, its stockholders. Pursuant to the Exchange
Agreement, the shareholders of Gamers transferred all of the issued and
outstanding shares of common stock of Gamers to us in exchange for 7,090,000
newly issued shares of our common stock (the “Transaction”). At the
time of the Transaction, our corporate name was City Language Exchange, Inc.
Following the merger, we changed our name to Game Trading Technologies,
Inc. (the “GTT”) and our trading symbol to “GMTD.OB.” As a result of the
Transaction, Gamers became our wholly-owned subsidiary, with Gamers’ former
shareholders acquiring a majority of the outstanding shares of our common
stock. In connection with the Transaction, we completed the closing
of a private placement for aggregate gross proceeds of $3,900,000 in units, each
unit consisting of one share of our series A convertible preferred stock and a
warrant to purchase one share of our common stock to accredited and
institutional investors pursuant to the terms of a Securities Purchase
Agreement, dated as of February 25, 2010.
Exchange
Agreement
Pursuant
to the Exchange Agreement, at closing, we issued an aggregate of 7,090,000
shares of our common stock to the former shareholders of Gamers, representing
69.24% of our outstanding common stock following the Transaction and private
placement (inclusive of 1,950,000 shares of common stock underlying the series A
convertible preferred stock sold in the private placement), in exchange for 100%
of the issued and outstanding shares of Gamers common stock. The
consideration issued in the Transaction was determined as a result of
arm’s-length negotiations between the parties.
The
shares of our common stock issued to former holders of Gamers common stock in
connection with the Transaction, and the series A convertible preferred stock
and warrants to purchase common stock issued in the private placement, were not
registered under the Securities Act of 1933, as amended (the “Securities Act”)
in reliance upon the exemption from registration provided by Section 4(2) of
that Act and Regulation D promulgated under that section, which exempts
transactions by an issuer not involving any public offering. These
securities may not be offered or sold in the United States absent registration
or an applicable exemption from the registration
requirements. Certificates representing these securities contain a
legend stating the same.
In
connection with the Transaction, we repurchased 34,745,070 shares of our common
stock owned by GTT’s former controlling shareholder for aggregate consideration
of $100 and then cancelled those shares at the closing of the
Transaction. Giving effect to the cancellation of these shares, there
were 1,200,000 shares of our common stock outstanding before giving effect to
the stock issuances in the Transaction and private placement. The
1,200,000 shares constitute our “public float” prior to the
Transaction.
Changes
Resulting from the Transaction
We intend
to carry on Gamers’ business as our sole line of business. Gamers is
headquartered in Hunt Valley, Maryland (approximately 15 miles north of
Baltimore), and is focused on developing an array of unique services supported
by innovative technologies to buy, repair, sell and trade pre-owned video games,
consoles and accessories primarily with national retail partners. We
have relocated our principal executive offices to those of Gamers at 10957
McCormick Road, Hunt Valley, Maryland. Our telephone number is (410)
316-9900, our fax number is (410) 316-9901 and our website is located at
www.gamersfactory.com. The contents of Gamers’ website are not part
of this report and should not be relied upon with respect thereto.
- 2
-
Pre-merger
stockholders of our company will not be required to exchange their existing City
Language Exchange stock certificates for certificates of Game Trading
Technologies, since the OTC Bulletin Board will consider the existing stock
certificates as constituting “good delivery” in securities transactions
subsequent to the Transaction.
Expansion
of Board of Directors; Management
In
connection with the Transaction, we amended our by-laws to increase the size of
our board of directors to five members.
Pursuant
to the Exchange Agreement, at the closing of the Transaction, Todd Hays and
Rodney Hillman, former directors of Gamers, were appointed to our board of
directors. Pursuant to the Transaction, an additional three directors will be
appointed in the near future. In connection with the appointment of
these directors, at the closing of the Transaction, Jonathan White, the sole
director of City Language Exchange prior to the Transaction, resigned as a
director. At the closing of the Transaction, the board of directors
appointed Mr. Hays as President and Chief Executive Officer, Mr. Hillman as
Chief Operating Officer, and Thomas Hays as Vice President - National Sales,
each of whom served in a similar position with Gamers. We are
actively seeking to hire a chief financial officer with public company
experience within the next three months. Mr. Hillman is currently
serving as our principal financial officer.
All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. Officers are elected
annually by the board of directors and serve at the discretion of the
board.
Following
the closing of the merger and private placement, the board approved the grant of
stock options to purchase a total of 1,000,000 shares of our common stock.
Accounting
Treatment; Change of Control
The
Transaction is being accounted for as a “reverse acquisition,” since the
shareholders of Gamers own a majority of the outstanding shares of our common
stock immediately following the Transaction. Gamers is deemed to be
the acquirer in the Transaction and, consequently, the assets and liabilities
and the historical operations that will be reflected in the financial statements
will be those of Gamers and will be recorded at the historical cost basis of
Gamers. Except as described in the previous paragraphs, no
arrangements or understandings exist among present or former controlling
stockholders with respect to the election of members of our board of directors
and, to our knowledge, no other arrangements exist that might result in a change
of control of our company. Further, as a result of the issuance of
the 7,090,000 shares of our common stock in the Transaction, and cancellation of
other shares, a change in control of our company occurred on the date of the
consummation of the Transaction. We will continue to be a “smaller
reporting company,” as defined under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) following the Transaction.
- 3
-
Private
Placement
In
connection with the Transaction, we completed the closing of a private placement
of $3,900,000 in units (each a “Unit” and collectively, the “Units”), each Unit
consisting of one share of our series A convertible preferred stock and a
warrant to purchase one share of our common stock, to purchasers that qualified
as accredited investors, as defined in Regulation D, pursuant to the terms
of a Securities Purchase Agreement, dated as of February 25,
2010. Each share of series A convertible preferred stock has a
stated value equal to $2.00 per share and is initially convertible at any time
into shares of common stock at a conversion price equal to $2.00 per share or an
aggregate of 1,950,000 shares of common stock, subject to adjustment under
certain circumstances. Each warrant entitles the holder to purchase
one share of common stock (equivalent to 100% warrant coverage in respect
of the shares underlying both the series A convertible preferred stock) at an
exercise price of $2.50 per share through February 25, 2015.
At the
closing, buyers that purchased preferred shares with
a stated value of at least $150,000 received short-term warrants
(each, a "Unit Purchase Option") to purchase, on the same terms as those units
sold at the closing, additional Units of preferred shares
and warrants equal to 50% of the units they purchased at
the closing. In the event that any holder of a Unit Purchase
Option does not exercise some or all of such option on or before the 55th day
following the closing, any unexercised portion of such Unit Purchase
Option will be offered and may be purchased (no later than the 60th day
following the closing) by each other holder of a Unit Purchase Option
that elects to exercise its Unit Purchase Option in full. The conversion
shares underlying the preferred shares receivable upon exercise of a
Unit Purchase Option and the warrant shares underlying the warrants
receivable upon exercise of a Unit Purchase Option will receive the same
registration rights as those securities underlying the investment units
issued at closing.
We
received gross proceeds from the private placement of $3,900,000.
Meyers
Associates, L.P., a FINRA registered broker-dealer, was engaged as placement
agent in connection with the private placement. We paid the placement
agent a cash fee in the amount of $80,500 and issued them warrants to purchase
25,000 shares of common stock at $2.50 per share.
In
accordance with the terms of the private placement, certain shareholders of
Gamers, including Todd Hays, our chief executive officer and Rodney Hillman, our
chief operating officer (collectively, the “Management
Shareholders”), deposited an aggregate of 740,000 shares issuable to
them from the Transaction into a performance milestone escrow
account. Based on our attaining one of several delineated levels of
adjusted EBITDA (earnings before interest, taxes, depreciation and amortization,
less certain non-cash charges) for the 12 months ending March 31, 2011 and 2012,
the escrowed shares will be returned to the Management Shareholders, released
pro rata to the investors in the private placement or transferred among the
parties based on specified allocations.
After the
closing of the Transaction and the private placement, we had 10,240,000 shares
of common stock outstanding, inclusive of 1,950,000 shares of common stock
underlying the series A convertible preferred stock sold in the private
placement. The Company also has 3,185,000 outstanding warrants to
purchase shares of common stock, with a substantial majority of the warrants
exercisable at $2.50 per share.
- 4
-
Lock-up
Agreements
In
connection with the private placement, former Gamers shareholders who now hold
in the aggregate 7,090,000 shares of our common stock, entered into lock-up
agreements with us. The lock-up agreements provide that their shares may not be,
directly or indirectly, publicly sold, subject to a contract for sale or
otherwise transferred for a period ending on earlier to occur of (a) 12 months
after the effective date the registration statement to be filed in connection
with the private placement, as described below, or (b) 24 months after the
closing of the private placement. For the 18 months following the
applicable initial lock-up period, each shareholder may sell its securities at a
rate of 5.56% (or 1/18th) of their initial holdings per month, but only at a
price of greater than $3.00 per share. Furthermore, beginning on the
18-month anniversary of the closing, each shareholder may sell its shares of
common stock, without regard to the number of such shares, at a price of greater
than $4.00 per share if the trailing 30-day average daily trading volume for our
common stock is greater than 100,000 shares. The lock-up agreements
terminate on the earlier of (i) date that is 42 months following the closing, or
(ii) 120 days following the last date in which all of the all shares of series A
convertible preferred stock held by our lead investor have been converted into
shares of our common stock.
Registration
Rights
In
connection with the private placement, we agreed with investors in the private
placement to file a registration statement with the U.S. Securities and Exchange
Commission covering the resale of 100% of the shares of common stock underlying
the series A convertible preferred stock, and the warrants issued in connection
with the private placement (including any securities purchased pursuant to the
unit purchase option) within 120 days after the closing of the private
placement. We are obligated to maintain the effectiveness of the registration
statement from its effective date until all registrable shares covered by the
registration statement have been sold, or may be sold without volume or manner
of sale restrictions under Rule 144. We also agreed to use our best
efforts to have the registration statement declared effective by the SEC as soon
as possible, but in any event within 240 days after the closing of the private
placement (or 270 days if the registration statement receives a full review by
the SEC). In the event the registration statement is not filed with
the SEC on or prior to the 120th day
after the closing of the private placement or the registration statement is not
declared effective by the SEC on or prior to the 240th day (or
270th day, as
applicable) after the closing of the private placement, each named selling
stockholder will be entitled to receive registration default damages in the
amount of 2% of the total purchase price of their securities per month, provided
that the aggregate amount of damages may not exceed 12% of the purchase
price.
Employment
Agreements
We
entered into employment agreements with Todd Hays and Rodney Hillman effective
at the closing of the Transaction and private placement. The
employment agreements require each of the executives to devote all of their time
and attention during normal business hours to our business as our Chief
Executive Officer and our Chief Operating Officer, respectively. The
employment agreements provide that each executive will receive an annual salary
of $175,000 and $125,000 per year, respectively. In addition, each executive is
entitled to (a) receive a cash bonus in an amount determined by the compensation
committee of the board of directors if we meet or exceed certain mutually agreed
upon performance goals and (b) participate in our stock option
plan.
The
employment agreements provide for termination of an executive’s employment
without any further obligation on our part upon the death or disability of the
executive or for cause. In the event that an executive’s employment
is terminated without cause or for good reason, we are obligated to pay such
executive his salary for the remainder of the term. Termination for
cause means termination as a result of (w) willful and material malfeasance,
dishonesty or habitual drug or alcohol abuse by the executive related to or
affecting the performance of his duties, (x) continuing and intentional breach,
non-performance or non-observance of any of the terms or provisions of the
employment agreement, but only after the failure of the executive to cure the
breach within ten days of receipt of notice from us, (y) conduct which the board
determines could reasonably be expected to have a material adverse effect on us,
but only after the failure of the executive to cease such conduct within ten
days of receipt of notice from us, or (z) the executive's conviction of a
felony, any crime involving moral turpitude related to or affecting the
performance of the executive’s duties or any act of fraud, embezzlement, theft
or willful breach of fiduciary duty against us. Good reason means (i)
material breach of our obligations under the employment agreement, (ii) any
decrease in the executive's salary during the term of the executive’s employment
(except for decreases that are in conjunction with decreases in executive
salaries generally), or (iii) a reduction in their duties or authority
inconsistent with the duties and authority of an executive officer. In the event
Todd Hays is terminated without cause or not for good reason, the Company shall
use its best efforts to remove Mr. Hays from any personal guarantees under
financing arrangements on behalf of the Company or its subsidiaries and/or
release any pledges made by Mr. Hays of his personal property in connection with
financing arrangements on behalf of the Company or its subsidiaries, and, in the
event the Company has not caused such guarantees to be removed or pledges to be
released within six (6) months after the termination date, the Company shall
repay and extinguish the subject financing arrangement.
The
employment agreements also contain covenants (a) restricting the executive from
engaging in any activity competitive with our business during the term of the
employment agreement and in the event of termination for cause or without good
reason, for a period of one year thereafter, (b) prohibiting the executive from
disclosing confidential information regarding us, and (c) soliciting our
employees, customers and prospective customers during the term of the employment
agreement and for a period of one year thereafter.
Please
see Item 2.01 (Completion of Acquisition or Disposition of Assets) of this
current report on Form 8-K for a description of these transactions and the
material agreements entered into in connection therewith, which disclosure is
incorporated herein by reference.
The
foregoing information is a summary of the agreements involved in the
transactions described above, is not complete, and is qualified in its entirety
by reference to the full text of such agreements, a copy of which are attached
as an exhibit to this Current Report on Form 8-K. Readers should
review such agreement for a complete understanding of the terms and conditions
associated with this transaction.
Item
2.01
|
Completion
of Acquisition or Disposition of
Assets.
|
The
Exchange Agreement
On
February 25, 2010, we entered into the Exchange Agreement with
Gamers. The Transaction closed on February 25, 2010, and Gamers is
now our wholly-owned subsidiary. All of our business operations will
be conducted through Gamers. Through the Transaction, the former
shareholders of Gamers received an aggregate of 7,090,000 shares of our common
stock. Prior to the Transaction, there were no material relationships
between us and Gamers or between Gamers and our respective affiliates, directors
or officers, or any associates of our respective officers or
directors. Immediately following the Transaction, we changed our name
to Game Trading Technologies, Inc. from City Language Exchange
Incorporated.
On
February 25, 2010, our board of directors determined that it was in the best
interests of our company and our stockholders to discontinue the pre-merger
business operations of City Language Exchange following the Transaction in favor
of Gamers’ new business.
- 6
-
Election
of Board of Directors; Appointment of Officers
Pursuant
to the Exchange Agreement, at the closing of the Transaction, Todd Hays and
Rodney Hillman, former directors of Gamers, were appointed to our board of
directors. Pursuant to the Transaction, an additional three directors will be
appointed in the near future. In connection with the appointment of these
directors, at the closing of the Transaction, Jonathan White, the sole director
of City Language Exchange prior to the Transaction, resigned as a
director. At the closing of the Transaction, the board of directors
appointed Mr. Hays as President and Chief Executive Officer, Mr. Hillman as
Chief Operating Officer, and Thomas Hays as Vice President - National Sales,
each of whom served in a similar position with Gamers. We are
actively seeking to hire a chief financial officer with public company
experience within the next three months.
Description
of Business
References
to “we,” “us” or “our” throughout this report refer to us and GTT together,
unless the context indicates otherwise.
Overview
of Game Trading Technologies
Founded
in 2003 as “Gamers Factory, Inc.” and headquartered in Hunt Valley, MD, Game
Trading Technologies, Inc. (“GTT” or the “Company”) is a leading video game
trading services provider focused on valuation, procurement, refurbishment, and
redistribution of pre-owned video games.
GTT
currently offers unique services, supported by innovative technologies to an
array of national firms, allowing them to better serve customers who want to
trade their games for store credit or purchase pre-owned games. The
foundation of most of these relationships is GTT’s proprietary game trading
database, which updates values on more than 10,000 video games and consoles on a
daily basis according to market conditions. Consumers who shop at
GTT’s partner locations have the ability at any given time to trade in a single
game or console, or an entire collection. In exchange, they receive
store credit in the form of a gift card that can be used to purchase anything
the retailer sells. The unique advantage that GTT offers in
conjunction with the trade values is a guaranteed purchase of those items as a
pass-through directly from the retailer.
GTT
provides services to various partners based upon the goals of each participant
in the pre-owned games market. In some cases we provide turnkey
trading services allowing retailers to acquire games from their customers and
sell to us. In other cases we provide only our data so that they can
offer trading within their existing structure. Some partners accept
trades using our process and restrict those items only for sale back to their
customers. We also sell pre-owned games direct, primarily to our main
customer, GameStop, and through other non-traditional channels.
Selling
of pre-owned games not only provides a solid value to the consumer, but also
results in environmental advantages as the extension of lives of these items
leads to lower overall disposal volumes within landfills.
Many
retailers are searching for ways to provide additional services to keep their
loyal customers coming back to the stores. Allowing customers to
convert their unwanted video games and consoles into store credit or gift cards
helps to achieve that goal. GTT is maximizing this value proposition
for consumers by developing a collection of partners as suppliers, customers,
and recyclers or in some cases all three.
Our
primary retail customer is GameStop and its affiliates, the world’s largest
video game retailer with more than 6,100 stores in the United States and 17
other countries. Other major relationships include Best Buy,
Wal-Mart, Toys”R”Us, 7-Eleven, GameFly, Dealtree, Gazelle, NORAM, and COKeM
International.
- 7
-
As the
pre-owned video game industry matures, there is an inherent need to facilitate
the structured movement of games, accessories and consoles from owners who no
longer want these valuable items to buyers who are searching for high quality
pre-owned products that are fairly priced. GTT aims to facilitate
this need in the market by creating the ultimate outlet for consumers to
exchange these items.
Corporate
Structure and Organizational History
As a
result of the Transaction, below is the corporate structure of the Company and
its operating subsidiary:
Game
Trading Technologies, Inc. (DE)
|
|
(formerly
City Language Exchange Incorporated)
|
|
Gamers
Factory, Inc. (MD)
|
Video
Game Industry
According
to NPD Group, Inc., an independent market research firm, the video game industry
experienced exceptional growth in 2007 with software sales up 34% over 2006. In
2008, the video game market continued its rally and experienced an increase in
software and hardware sales of 27% and 11% year-over-year respectively, sparking
the sentiment that the video game industry could in fact be recession proof. As
can been seen in the chart below, US video game software sales increased every
month Y/Y with the exception of minor declines in just two of the months, in the
2007 and 2008 time frame.
Source:
The NPD Group
- 8
-
After an
increase in sales in January and February 2009, the video game market’s growth
came to an abrupt halt amidst the backdrop of the tough macroeconomic
environment. As noted in the chart below, 2009 has been a difficult year for the
industry in both software and hardware sales as only four months of the year
(January, February, September, and December) showed year over year
increases. However, the year did end on a positive note as December
marked the biggest sales month ever for the industry with a 4% increase over the
record breaking December 2008. Console Hardware and Accessories were the two
fastest-performing categories in December, up 20% and 19% Y/Y, respectively.
Sales of game software were down 7% in December.
Source:
The NPD Group
Pre-owned
Video Game Industry and Growth Drivers
Despite a
tough year for the video game industry, the pre-owned video game segment has
continued to post stable growth. Reflecting the weaker economy,
consumers have increasingly been looking to trade-in pre-owned games for cash or
credit and to seek good value by purchasing pre-owned games. GameStop
(GME), the world's largest retailer of video games (new and pre-owned) and a
good proxy for the new and pre-owned video game industry’s performance as a
whole, announced 9 months results as of October 2009 that showed a 3% decline in
sales of new video game hardware, 1% decline in sales of new video game
software, and 23% increase in sales of pre-owned video game
products.
- 9
-
According
to a research report issued by Needham & Company, LLC, dated October 21,
2009, the size of the pre-owned video game market in the United States and
Europe during the period 2000 through 2009 is approximately 3.4 billion units of
software. According to the same report, this figure is estimated to
rise to 3.9 billion units by the end of 2010. Needham’s estimates are
based on the following internal market data projections:
Cumulative
Units Sold: 2000-2009E
Hardware
|
Software
|
|||||||
(millions
of units)
|
(millions
of units)
|
|||||||
Nintendo
|
||||||||
Game
Boy
|
18.8 | 120.8 | ||||||
Game
Boy Advance
|
72.2 | 272.0 | ||||||
Super
NES
|
- | 2.9 | ||||||
N-64
|
5.4 | 61.4 | ||||||
Game
Cube
|
18.9 | 157.0 | ||||||
DS
and Dsi
|
74.9 | 438.0 | ||||||
Wii
|
46.5 | 282.5 | ||||||
Sony
|
||||||||
PSOne
|
25.2 | 326.0 | ||||||
PS2
|
91.7 | 962.0 | ||||||
PS3
|
25.7 | 138.6 | ||||||
PSP
|
35.8 | 174.5 | ||||||
Microsoft
|
||||||||
X-Box
|
22.9 | 227.5 | ||||||
X-Box
360
|
28.5 | 244.4 | ||||||
Other
|
4.8 | 30.0 | ||||||
Total
units
|
471.3 | 3,437.6 | ||||||
Source:
Needham & Co. estimates
|
GME
booked $1.617 billion in the first 9 months ended October 31 of this year in
pre-owned video game revenue. Of that, Needham & Co estimates
that at least 80% was software, and the rest hardware and
peripherals. If we assume an average price of about $18 per unit (as
disclosed in GME's 2008 10K), this implies that the company sold about 72
million units of pre-owned video game software in the first nine months of
2009. As the largest seller in the pre-owned video game market, we
can see that GME’s 72 million unit sale is small fraction of the market
estimated above. What this indicates is that once the concept of
trading is broadened to a wider consumer base, there will be additional supply
in the market to support continued expansion of pre-owned both for GameStop and
for other entrants to the market.
In a 2009
study published by Nielsen an interesting trend continues with respect to
claimed purchases of pre-owned games. The ratio of pre-owned games
purchased to total games purchased increased during the first five months of
2009 (full year 2009 analysis is not yet published). Additionally
average hours played per week showed a dramatic increase over 2008 and those
polled indicated that they had purchased one additional pre-owned game on
average as compared to 2008.
- 10
-
Games
Purchased – Pre-owned vs. Total
Average Number of
Games Purchased
Used in Past 6 Months
|
Total Average Number
of Games Purchased in
Past 6 Months
|
Games Purchased
Used Ratio
|
||||||||||
January
2009
|
3.01 | 10.35 | 0.29 | |||||||||
February
2009
|
3.50 | 10.56 | 0.33 | |||||||||
March
2009
|
3.58 | 10.64 | 0.34 | |||||||||
April
2009
|
3.52 | 10.63 | 0.33 | |||||||||
May
2009
|
3.51 | 9.75 | 0.36 |
Source:
Nielsen Video Game Tracking Survey
Products
and Services
Merchandise
Substantially
all of our revenues are derived from the sale of video game products. Our
product offerings consist of pre-owned video game products including game
software, system consoles and accessories. Our inventory generally
consists of a constantly changing selection of more than 10,000 SKUs
(stock-keeping units). We rely upon our proprietary pricing engine to
rapidly and continuously value all products coming into our facility either via
consumer returns or trade-ins. This enables us to correctly sell the
product later, either online or to our numerous retail ready and bulk
customers. We refurbish games, hardware and accessories in our
Maryland distribution facility.
Bulk
Sales
GTT
provides “as-is” games, accessories and hardware in bulk to our primary retail
customer, GameStop. The items are mainly consumer returns from major
national retailers; however, GTT also provides a significant amount of trade-ins
as long as these items fit within the valuation criteria for pre-owned products
and they are approved for purchase by GameStop.
Game
Trading Services
GTT has
developed the following portfolio of service offerings focused on game trading,
which permits retail partners to acquire needed supply from its customer
base. Consumers can easily dispose of their unwanted games and
consoles, and receive value in the form of store credit from the participating
retailer.
·
|
Game Valuation Database
– Live daily updates are provided to retail partners who utilize the data
to make guaranteed offers to customers who enter the store or shop
online. All games and video game consoles in existence are
updated daily with suggested retail and trade
values.
|
·
|
Store-based Software
Application – GTT provides a turnkey software solution, in
partnership with our POS (point-of-sale) specialist, Tempus Technologies,
that allows retailers to operate a game trading business regardless of the
capabilities of their legacy
systems.
|
- 11
-
·
|
Online Feed / Websites –
Certain partners can receive daily feeds of valuation data customized to
meet their specifications for the purposes of translating the information
into their own format as offered online. GTT also offers
turnkey website development and maintenance providing retailers with an
online presence for the purpose of accepting trade-ins. GTT
also operates its own website for the purpose of obtaining video game
trade-ins direct from consumers. The website operates under the
Gamers Factory brand and can be found at
www.gamersfactory.com.
|
·
|
Guaranteed Purchase –
Games and consoles valued by GTT’s applications are backed by a guaranteed
purchase of the items from the retailer. Some form of product
acquisition is a feature of most service
agreements.
|
Certified
Pre-Owned Games, Consoles and Accessories
GTT
operates a refurbishment center for the purpose of testing and repairing
pre-owned video games, consoles and accessories. Approximately 97% of
all acquired products, either through trade-in or consumer return, are
repairable by GTT. The remaining 3% are actually resold as well, to
other refurbishers and retailers with more specialized equipment.
Once the
video game products are repaired and/or cleaned to a “like new” and playable
condition, they are then shrink-wrapped and stickered according to
specifications set by the customer.
Products
sold in playable condition that are deemed to be defective are covered with the
customer by GTT in different ways depending on the negotiated
arrangement. In some cases there are full return privileges (with
full credit for the items). In other cases GTT provides a defective
allowance that is subtracted from each invoice to cover costs incurred by the
customer in accepting damaged merchandise.
Vendor
Managed Inventory Programs
GTT
operates programs in which new and pre-owned games are shipped
directly to stores for retail partners, where sell-through and replenishment are
monitored and managed directly. A wide variety of game titles are
available, and are generally supplied from a combination of closeouts and
trade-in programs.
Drop
Ship Programs and Online Sales
GTT
operates drop ship programs where GTT inventory of pre-owned games is offered
for sale via a retail partner’s website. Items purchased by the
retail partner’s customer are then drop shipped directly to that customer from
our Maryland facility.
GTT also
operates eBay and Amazon.com stores and our own website, www.gamersfactory.com,
where games, consoles and accessories are sold directly to the
consumer. To date, online sales have accounted for 3% of our total
net sales.
Vendors
We
currently purchase our products from several national retailers. The
products are consumer-returned items that may not be defective but nonetheless
cannot be resold as new in their stores. We acquire these goods
directly from the retailers through their reverse logistics operations, or in
some cases through external firms which contract with these
retailers. We acquire products, either defective or new, through
video game distributors. We also acquire products, which include
defective retailer returns, direct from publishers. Our transition
strategy calls for a dramatic expansion toward trade-in programs via retail
counters, kiosks, and online websites. We believe that once the
general public realizes that they can trade these items and gain significant
value in the process, trade-ins will outpace the supply from consumer returns
and other sources
- 12
-
Customers
A
majority of the population uses video game products in some form. GTT
relies upon the rapid expansion of pre-owned video games and acceptance by
consumers in serving retailers, our main customer base. Growth
projections within the industry indicate that demand will continue to exceed
supply for the foreseeable future; however, GTT’s challenge will be to work with
the right partners to deliver these products. Unlike new games or
other traditional industries, GTT is largely able to set the purchase price for
trade-ins, which allows for an orderly market valuation of all games regardless
of age, platform or title. For example, a game that may not have sold
well as new for $59.99 may be very popular years later as a pre-owned value at
$14.99. We believe our customers understand this dynamic and are
making investments and establishing corporate objectives to expand
product/service offerings into pre-owned game trading and sales.
As of
December 31, 2009, GTT had approximately 70 customers not including individual
consumers who bought directly from our online programs. A representative
sample of our customers includes:
·
|
Traditional
national retailers already in the business of new games or pre-owned games
such as GameStop, who is the market leader. We also are working
with several other national retailers primarily to develop trade-in
programs to support limited sales efforts either online or in
stores.
|
·
|
Small
businesses with anywhere from one to 20 retail outlets, including Play N
Trade, a franchise operation specializing in video game sales, trading and
rentals.
|
·
|
End
consumers who routinely trade in or purchase products directly from GTT
via our website or our eBay and Amazon.com
stores.
|
GTT has
historically been relatively dependent on sales of its video game products to a
small number of accounts. Approximately 92% of GTT’s net sales for
the fiscal year ended December 31, 2009 resulted from sales to 5 customers
including GameStop (77%). Approximately 52% and 74% of GTT’s net
sales for 2008 and 2007 resulted from sales to five customers,
respectively.
Revenues
from sales of specific video game products are recorded when title transfers,
which is typically upon shipment to wholesale customers and sale to retail
customers.
Due to
the nature of our purchasing arrangements and customer base, GTT refurbishes and
ships products to its customers without incurring material backlog.
Sales,
Marketing and Customer Support
GTT
relies on the expertise of a small sales team and the strong relationships that
have evolved with most national retailers over a period of more than two
decades. Due to the customized nature of each relationship, an
executive level person from the company is assigned to each major
account. With the recent expansion of these accounts and the volume
of business, we have added more positions to the management team to retain focus
and build each account. With regard to our smaller customers, we
developed a business-to-business website (www.gfib2b.com), allowing us to fully
automate normal interactions (ordering, billing and customer service) with
existing and potential customers. GTT is the only company that
provides such an automated service in the pre-owned video game
industry.
- 13
-
Due to
the small group of major retail customers in the industry, GTT’s marketing
activities have historically been nominal. Additional large customers
are generally acquired through direct contact and relationships. We
maintain a small budget for internet advertising with respect to our online
trade-in programs and our website. We also rely upon the branding and
marketing efforts of our retail partners to supplement our own marketing efforts
in the space.
Our
personnel provide value-added services to each customer, including specialized
knowledge of each customer’s specifications, processes and
strategies. We also provide very detailed support for all of our
Amazon, eBay and GTT website customers who order from us
directly. Our customer service ratings on both eBay and Amazon are
extremely high, which we believe provides a key point of differentiation from
our competition.
Relationship
with GameStop
In April
2009, GTT entered into an agreement with GameStop and its affiliates, the
largest retailer of pre-owned video games in the world. It operates
more than 6,100 retail stores and provides its customers with an opportunity to
trade in their pre-owned video game products in the stores in exchange for store
credits which can be applied towards the purchase of other products, primarily
new merchandise. GameStop is the industry leader in video game trade-ins, using
the inventory to resell to value-oriented customers.
GTT’s
agreement with GameStop provides for the sale of “as-is” consumer returns of
video game software, accessories, and hardware from certain major national
retailers, with the expectation that GTT has title and ownership of the items
and has the legal right to sell the items. The agreement has a term
of two years from the effective date. GTT does not guarantee the
working condition of the products; however, in the event that a certain
percentage of goods delivered by GTT is physically damaged (2% and 5%, in the
case of software and accessories, respectively), GameStop shall have the right
to reject such products from GTT.
Competition
and Competitive Advantages
The
electronic game industry is intensely competitive and subject to rapid changes
in consumer preferences and frequent new product introductions. Continued
evolution in the industry, as well as technological migration, is opening up the
market to increased competition. We believe that we maintain a competitive
advantage in the industry through our strong customer and vendor relationships,
our technological leadership and capabilities, and our comprehensive range of
product and services offerings.
In terms
of direct competition, management believes there are no other companies that
provide a similarly broad array of products and services. There are,
however, certain competitors within each segment of our business.
Game
Trading and Valuation
GTT is
not aware of any competitor who offers game trade-in valuation as a service to
retailers in conjunction with guaranteed acquisition of those traded
items. The following entities have valuation models which they
utilize to acquire games directly from consumers:
- 14
-
·
|
Amazon.com
– Amazon launched game and movie trading in 2009. They had
actually approached GTT to partner with game trading but a suitable
business arrangement could not be reached. Currently Amazon
offers a limited library of game trade-in offers, with valuation driven by
pre-owned game retail values on their
site.
|
·
|
BRE
Software – A privately held company based in Fresno, California, BRE has
been operating a trade-in valuation database since 1989 for the purpose of
acquiring pre-owned games and reselling them, primarily
online. They do not have a presence with respect to retail
partnerships.
|
·
|
Retailers
– Various retailers who operate trade-in programs such as small video
rental chains, Hastings Entertainment, TransWorld Entertainment, as well
as GameStop, the leader in the space, are technically in competion;
however, this is indirect in that trade-ins are primarily limited to a
specific retailers customer base rather than a destination based
transaction.
|
Wholesale/Distribution
GTT
provides hybrid wholesale and distribution services. With respect to
this business, our competitors are generally non value-added brokers acting on
behalf of certain retailers to acquire retail-returned goods or small online
retailers who tend to bid sporadically on product loads and then liquidate items
they cannot sell online. We are unaware of any other competitor who
processes pre-owned games in large volume and sells either “as-is” or as fully
refurbished “retail ready” to major national retailers. Because our
refurbishment operation is a mechanism to produce finished goods, we do not
consider outsourced refurbishment operations as competitors.
Online
Competitors
include Amazon.com and their associated merchants, various eBay sellers, and a
number of smaller online sellers which operate their own websites.
Seasonality
GTT’s
business is seasonal because it relies upon retailers and consumers, with the
major portion of our sales and operating profits occurring during the first
fiscal quarter following the holiday selling season. Since our supply
of video game products depends significantly on consumer and retail returns,
these items are most plentiful right after the holiday season in January through
March. Our sales tend to lag by one quarter behind the traditional
retail seasonality for this reason. We have historically generated
our highest sales and operating profits during the first quarter of the
year. However, with the expansion of trade-in programs and other
sources of supply currently in development, we do not expect this trend to
continue.
Regulation
Our
business activities currently are subject to no particular regulation by
governmental agencies other than that routinely imposed on corporate businesses,
and no such regulation is now anticipated.
- 15
-
Facilities
Our
corporate offices and manufacturing and distribution facility are located at
10957 McCormick Road, Hunt Valley, Maryland. We lease approximately
33,000 square feet of space for our entire operations with approximately 5,000
square feet devoted to office space and 28,000 square feet devoted to
warehousing, refurbishment and distribution operations. Our lease
expires in January 2012, and we currently pay approximately $176,000 in annual
rent under the lease. From time to time we enter short term and month
to month lease agreements for overflow warehouse space to accommodate spikes in
our business. As of December 31, 2009 no overflow space was
leased. These facilities are adequate for our present business, and
are expected to accommodate our needs for the foreseeable future.
On August
15, 2005, GTT guaranteed payments on an operating lease agreement for a retail
operation that sold pre-owned video game products direct to the
public. In 2006 this segment of GTT’s business was discontinued;
however, GTT remains obligated under the terms of the lease through 2015 unless
a termination or sublease arrangement is reached prior. We currently
pay approximately $88,000 in annual rent under the lease.
Employees
As of
December 31, 2009, GTT had 68 full-time employees. GTT has not
experienced any work disruptions or stoppages and it considers relations with
its employees to be good. None of its employees are covered by a
collective-bargaining agreement.
Legal
Proceedings
We are
not involved in any pending or threatened legal proceedings.
- 16
-
Risk
Factors
An investment in our common
stock involves a high degree of risk. You should carefully consider the
risks described below, together with all of the other information included in
this report, before making an investment decision. If any of the following
risks actually occurs, our business, financial condition or results of
operations could suffer. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. You should
read the section entitled “Special Notes Regarding Forward-Looking Statements”
above for a discussion of what types of statements are forward-looking
statements, as well as the significance of such statements in the context of
this report.
Risks
Relating to Our Business and Industry
Our
limited operating history makes it difficult to evaluate our future business
prospects and to make decisions based on of our historical
performance.
Although
our management team has been engaged in the video game industry for an extended
period of time, we did not begin operations of our current business focusing on
pre-owned video games until 2003 and we did not restrict operations to our
current form until 2007. We have a limited operating history in our current
form, which makes it difficult to evaluate our business on the basis of
historical operations. As a consequence, it is difficult, if not impossible, to
forecast our future results based upon our historical data. Reliance on our
historical results may not be representative of the results we will achieve.
Because of the uncertainties related to our lack of historical operations, we
may be hindered in our ability to anticipate and timely adapt to increases or
decreases in sales, product costs or expenses. If we make poor budgetary
decisions as a result of unreliable historical data, we could be less profitable
or incur losses, which may result in a decline in our stock price.
Our
results of operations have not been consistent, and we may not be able to
maintain profitability.
We
incurred a net profit of $1,740,498 for the year ended December 31, 2009 and a
net profit of $325,499 for the year ended December 31, 2008. Although our
revenues grew substantially due to our growth strategy in 2009, there is no
assurance that we will be successful in executing our business plan or that even
if we successfully implement our business plan, that we will sustain
profitability now or in the future. If we incur significant operating losses,
our stock price may decline, perhaps significantly.
Our
ability to obtain favorable terms from our suppliers may impact our financial
results.
Our
financial results depend significantly upon the business terms we can obtain
from our suppliers, primarily competitive prices and consistent
availability. Because substantially all of our purchases are already
cash in advance we do not have risk associated with loss of favorable payment
terms. We currently purchase the majority of our products directly
from third party reverse logistics and distribution companies. We do
not have fixed or guaranteed contracts for these purchases. We also
acquire products from consumers via trade-in programs we operate for retail
partners. If our suppliers do not provide us with favorable business
terms, we may not be able to offer products to our customers at competitive
prices.
- 17
-
If
the products that we offer do not reflect our customers’ tastes and preferences,
our net sales and profit margins could decrease.
Our
success depends in part on our ability to offer products and services that
reflect consumers’ tastes and preferences. Consumers’ tastes are subject to
frequent, significant and sometimes unpredictable changes. Because the products
that we sell typically consist of manufacturers’ and retailers’ excess
inventory, we have limited control over the specific products that we offer for
sale. If the merchandise we offer for sale fails to satisfy customers’ tastes or
respond to changes in customer preferences, our sales could suffer and we could
be required to mark down unsold inventory which could depress profit margins. In
addition, any failure to offer products and services in line with customers’
preferences could allow competitors to gain market share, which could harm our
business, results of operations and financial condition.
A
significant portion of our revenue is dependent upon a small number of customers
and the loss of any one of these customers would negatively impact our revenues
and our results of operations.
Our sales
to our top five customers accounted for approximately 92% and 52% of our net
sales for the years ended December 31, 2009 and December 31, 2008,
respectively. Contractual relationships with our major customers do
not guarantee sales volumes or longevity. Consequently, our
relationship with these retailers could change at any time. Our
business, results of operations and financial condition could be adversely
affected if:
·
|
we
lose any of our significant customers;
|
|
·
|
any
of these customers purchase fewer of our product offerings;
or
|
|
·
|
we
experience any other adverse change in our relationship with any of these
customers.
|
Customer
mix shifts significantly from year to year, but a concentration of the business
with a few large customers is typical in any given year. A decline in
our net sales could occur if a customer that has been a significant factor in
one financial reporting period gives us significantly less business in the
following period.
The
ability to download video games and play video games on the Internet could lower
our sales.
While it
is currently only possible to download a limited amount of video game content to
the next generation video game systems, at some point in the future this
technology may become more prevalent. If advances in technology continue to
expand our customers’ ability to access video games and incremental content for
their games through these and other sources, our customers may no longer choose
to purchase video games for sale in their stores. As a result, net sales and net
income could decline.
Restrictions
on our ability to take trade-ins of and sell pre-owned video game products could
negatively affect our financial condition and results of
operations.
Our
financial results depend on our ability to take trade-ins of, and sell,
pre-owned video game products. Actions by manufacturers or publishers of video
game products or governmental authorities to limit our ability to take trade-ins
or sell pre-owned video game products could have a negative impact on our sales
and earnings.
An
adverse trend in sales during the holiday season could impact our financial
results.
Our
business is seasonal, with our most significant sales and operating profits
realized during the first fiscal quarter (post-holiday season), which is when
significant volumes of consumer returns become available for
purchase. Should post-holiday sales projections be lowered for
retailers, our sales may be impacted.
- 18
-
We
have not sought to protect our proprietary knowledge through patents and, as a
result, our sales and profitability could be adversely affected to the extent
that competing products/services were to capture a significant portion of our
target markets.
We have
generally not sought patent protection for our products and services, relying
instead on our technical know-how and ability to design solutions tailored to
our customers’ needs. Our sales and profitability could be adversely affected to
the extent that competing products/services were to capture a significant
portion of our target markets. To remain competitive, we must continually
improve our existing personnel skill sets and capabilities and the provision of
the services related thereto. Our success will also depend, in part, on
management’s ability to recognize new technologies and services and make
arrangements to license in, or acquire such technologies so as to remain always
at the leading edge.
We
must effectively manage the growth of our operations, or our company will
suffer.
Our
ability to successfully implement our business plan requires an effective
planning and management process. If funding is available, we intend
to increase the scope of our operations and acquire complimentary
businesses. Implementing our business plan will require significant
additional funding and resources. If we grow our operations, we will
need to hire additional employees and make significant capital
investments. If we grow our operations, it will place a significant
strain on our existing management and resources. If we grow, we will
need to improve our financial and managerial controls and reporting systems and
procedures, and we will need to expand, train and manage our
workforce. Any failure to manage any of the foregoing areas
efficiently and effectively would cause our business to suffer.
Our
results of operations may fluctuate from quarter to quarter, which could affect
our business, financial condition and results of operations.
Our
results of operations may fluctuate from quarter to quarter depending upon
several factors, some of which are beyond our control. These factors
include:
·
|
the
availability of consumer returns in the marketplace;
|
|
·
|
the
volume of trade-ins provided by consumers to our retail partners;
and
|
|
·
|
consumer
spending patterns with our retail
partners.
|
These and
other factors could affect our business, financial condition and results of
operations, and this makes the prediction of our financial results on a
quarterly basis difficult. Also, it is possible that our quarterly financial
results may be below the expectations of public market analysts.
Our
sales and profitability may be affected by changes in economic, business and
industry conditions.
If the
economic climate in the United States or abroad deteriorates, customers or
potential customers could reduce or delay their technology
investments. Reduced or delayed technology investments could decrease
our sales and profitability. In this environment, our customers may
experience financial difficulty, cease operations and fail to budget or reduce
budgets for the purchase of our products and professional
services. This may lead to longer sales cycles, delays in purchase
decisions, payment and collection, and can also result in downward price
pressures, causing our sales and profitability to decline. In
addition, general economic uncertainty and general declines in capital spending
in the information technology sector make it difficult to predict changes in the
purchasing requirements of our customers and the markets we
serve. There are many other factors which could affect our business,
including:
- 19
-
·
|
the
introduction and market acceptance of new technologies, products and
services;
|
|
·
|
new
competitors and new forms of competition;
|
|
·
|
the
size and timing of customer orders;
|
|
·
|
the
size and timing of capital expenditures by our
customers;
|
|
·
|
adverse
changes in the credit quality of our customers and
suppliers;
|
|
·
|
changes
in the pricing policies of, or the introduction of, new products and
services by us or our competitors;
|
|
·
|
changes
in the terms of our contracts with our customers or
suppliers;
|
|
·
|
the
availability of products from our suppliers; and
|
|
·
|
variations
in product costs and the mix of products
sold.
|
These
trends and factors could adversely affect our business, profitability and
financial condition and diminish our ability to achieve our strategic
objectives.
We
face competition from numerous sources and competition may increase, leading to
a decline in revenues.
We
compete primarily with well-established companies, many of which we believe have
greater resources than us. We believe that barriers to entry are not
significant and start-up costs are relatively low, so our competition may
increase in the future. New competitors may be able to launch new
businesses similar to ours, and current competitors may replicate our business
model, at a relatively low cost. If competitors with significantly
greater resources than ours decide to replicate our business model, they may be
able to quickly gain recognition and acceptance of their business methods and
products through marketing and promotion. We may not have the
resources to compete effectively with current or future
competitors. If we are unable to effectively compete, we will lose
sales to our competitors and our revenues will decline.
We
are heavily dependent on our senior management, and a loss of a member of our
senior management team could cause our stock price to suffer.
If we
lose members of our senior management, we may not be able to find appropriate
replacements on a timely basis, and our business could be adversely
affected. Our existing operations and continued future development
depend to a significant extent upon the performance and active participation of
certain key individuals, including Todd Hays, our Chief Executive Officer, and
Rodney Hillman, our Chief Operating Officer. Although we have entered
into three-year employment agreements with them, we cannot guarantee that we
will be successful in retaining the services of these or other key
personnel. If we were to lose any of these individuals, we may not be
able to find appropriate replacements on a timely basis and our financial
condition and results of operations could be materially adversely
affected.
If
our management information systems fail to perform or are inadequate, our
ability to manage our business could be disrupted.
We rely
on computerized inventory and management systems to coordinate and manage the
activities of our refurbishment center, as well as to communicate daily pricing
data to retailers and other partners with which we work. If our
inventory or management information systems fail to adequately perform key
functions, our business could be adversely affected. In addition, if operations
in our refurbishment center were to shut down for a prolonged period of time,
our business could suffer.
- 20
-
We
may not have sufficient working capital in the long term.
It is
likely we may require additional funds in the long term depending upon the
growth of our revenues and our business strategy. We can give no assurance that
we will be able to obtain sufficient debt or equity capital now or in the future
to support our operations. Should we be unable to raise sufficient
debt or equity capital, we could be forced to cease operations.
Risks
Related to our Common Stock
We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our
common stock.
We have
never paid cash dividends on our common stock and do not anticipate paying cash
dividends in the foreseeable future. The payment of dividends on our
common stock would depend on earnings, financial condition and other business
and economic factors affecting us at such time as our board of directors may
consider relevant. If we do not pay dividends, our common stock may
be less valuable because a return on your investment will only occur if its
stock price appreciates.
There
is a limited market for our common stock which may make it more difficult to
dispose of your stock.
Our
common stock is currently quoted on the OTC Bulletin Board under the symbol
“GTMD.OB.” There is a limited trading market for our common
stock. Accordingly, there can be no assurance as to the liquidity of
any markets that may develop for our common stock, the ability of holders of our
common stock to sell shares of our common stock, or the prices at which holders
may be able to sell their common stock.
A
sale of a substantial number of shares of our common stock may cause the price
of the common stock to decline.
If our
stockholders sell substantial amounts of our common stock in the public market,
the market price of our common stock could fall. These sales also may
make it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem reasonable or
appropriate. Stockholders who have been issued shares in the
Transaction will be able to sell their shares pursuant to Rule 144 under the
Securities Act of 1933, beginning one year after the stockholders acquired their
shares, subject to limitations imposed by the lock-up agreements.
Our
common stock is subject to the "penny stock" rules of the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our stock.
The SEC
has adopted Rule 3a51-1, which establishes the definition of a "penny stock" for
the purposes relevant to us, as any equity security that has a market price of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, Rule 15g-9 requires:
·
|
that
a broker or dealer approve a person's account for transactions in penny
stocks; and
|
- 21
-
·
|
that
the broker or dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
|
In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:
·
|
obtain
financial information and investment experience objectives of the person;
and
|
|
·
|
make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
·
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
|
·
|
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to
dispose of our common stock and cause a decline in the market value of our
stock.
Because
certain of our stockholders control a significant number of shares of our common
stock, they may have effective control over actions requiring stockholder
approval.
Our
directors, executive officers and principal stockholders, and their respective
affiliates, beneficially own approximately 75.9% of our outstanding shares of
common stock. Accordingly, our executive officers, directors and principal
stockholders, and their respective affiliates, will have substantial influence
on the ability to control the company and the outcome of issues submitted to our
stockholders.
We
may be required to pay registration default liquidated damages if we cannot
fulfill the requirements of the registration rights granted to investors in the
private placement.
We are
required file a registration statement on or before June 25, 2010 and to have a
registration statement covering the shares of common stock declared effective by
the SEC on or before October 13, 2010, or if effectiveness of the registration
statement is suspended at any time other than pursuant to a suspension notice,
for each month during which the registration default remains uncured, we shall
be required to pay registration default damages at the rate of 2% of the
purchase price, up to a maximum of 12%. Any payment of
liquidated damages could have an adverse effect on our results of
operations.
- 22
-
Because
the holders of our warrants have cashless exercise rights, we may not receive
proceeds from the exercise of the outstanding warrants if the underlying shares
are not registered.
The
holders of our warrants have cashless exercise rights, which provide them with
the ability to receive common stock with a value equal to the appreciation in
the stock price over the exercise price of the warrants being exercised. This
right is not exercisable if the underlying shares are subject to an effective
registration statement and, accordingly, the holders have the cashless
registration rights until the effective date of the registration statement and
thereafter if the warrants are not subject to a current and effective
registration statement beginning 12 months from the closing date. To the extent
that the holders of the warrants exercise this right, we will not receive
proceeds from such exercise.
Any
adjustment in the exercise price could have a depressive effect on our stock
price and the market for our stock.
If we are
required to adjust the preferred stock conversion price or the warrant exercise
price pursuant to any of the adjustment provisions of the agreements relating to
the private placement or if we are required to pay liquidated damages, the
adjustment or payment, or the perception that an adjustment or payment may be
required, may have a depressive effect on both our stock price and the market
for our stock.
Failure
to maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our business and
operating results and stockholders could lose confidence in our financial
reporting.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our operating results could be harmed. Under the current SEC
regulations, we are required to include a management report on internal controls
over financial reporting in our annual report on Form 10-K for the year ending
December 31, 2009. Failure to achieve and maintain an effective
internal control environment, regardless of whether we are required to maintain
such controls, could also cause investors to lose confidence in our reported
financial information, which could have a material adverse effect on our stock
price. Although we are not aware of anything that would impact our ability to
maintain effective internal controls, we have not obtained an independent audit
of our internal controls, and, as a result, we are not aware of any deficiencies
which would result from such an audit. Further, at such time as we are required
to comply with the internal controls requirements of the Sarbanes-Oxley Act, we
may incur significant expenses in having our internal controls audited and in
implementing any changes which are required.
The
Company has not paid dividends in the past and does not expect to pay dividends
for the foreseeable future. Any return on investment may be limited
to the value of the Company’s common stock.
No cash
dividends have been paid on the Company’s common stock. We expect that any
income received from operations will be devoted to our future operations and
growth. The Company does not expect to pay cash dividends on its common stock in
the near future. Payment of dividends would depend upon our profitability at the
time, cash available for those dividends, and other factors as the Company’s
board of directors may consider relevant. If the Company does not pay dividends,
the Company’s common stock may be less valuable because a return on an
investor’s investment will only occur if the Company’s stock price
appreciates.
- 23
-
Management’s
Discussion and Analysis or Plan of Operation
The following discussion and
analysis should be read in conjunction with, and is qualified in its entirety
by, our financial statements (and notes related thereto) and other more detailed
financial information appearing elsewhere in this Current Report on Form 8-K.
Consequently , you
should read the following discussion and analysis of our financial condition and
results of operations together with such financial statements and other
financial data included elsewhere in this Current Report on Form 8-K. Some of
the information contained in this discussion and analysis or set forth elsewhere
in this Current Report on Form 8-K, including information with respect to our
plans and strategy for our business, includes forward-looking statements that
involve risks and uncertainties. You should review the “Risk Factors” section of
this Current Report on Form 8-K for a discussion of important factors that could
cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis.
Overview
On
February 25, 2010, we completed a “reverse acquisition” transaction, in which we
entered into the Exchange Agreement with Gamers and for certain limited
purposes, its stockholders. Pursuant to the Exchange Agreement, the shareholders
of Gamers transferred all of the issued and outstanding shares of common stock
of Gamers to us in exchange for 7,090,000 newly issued shares of our common
stock (the “Transaction”). At the time of the Transaction, our corporate name
was City Language Exchange, Inc. Following the merger, we changed our name to
Game Trading Technologies, Inc. (the “GTT”) and our trading symbol to “GMTD.OB.”
As a result of the Transaction, Gamers became our wholly-owned subsidiary, with
Gamers’ former shareholders acquiring a majority of the outstanding shares of
our common stock.
In
connection with the Transaction, we completed the closing of a private placement
for aggregate gross proceeds of $3,900,000 in units, each unit consisting of one
share of our series A convertible preferred stock and a warrant to purchase one
share of our common stock to accredited and institutional investors pursuant to
the terms of a Securities Purchase Agreement, dated as of February 25,
2010.
Gamers
buys, repairs, sells and trades pre-owned video games, consoles and accessories.
Gamers is headquartered in Hunt Valley, Maryland (approximately 15 miles north
of Baltimore), and is focused on developing an array of unique services
supported by innovative technologies to buy, repair, sell and trade pre-owned
video games, consoles and accessories primarily with national retail
partners.
The
transactions contemplated by the Exchange Agreement are being accounted for as a
“reverse acquisition,” since the shareholders of Gamers own a majority of the
outstanding shares of our common stock immediately following the Transaction.
Gamers is deemed to be the acquirer in the Transaction and, consequently, the
assets and liabilities and the historical operations that will be reflected in
the financial statements will be those of Gamers and will be recorded at the
historical cost basis of Gamers. Except as described in the previous paragraphs,
no arrangements or understandings exist among present or former controlling
stockholders with respect to the election of members of our board of directors
and, to our knowledge, no other arrangements exist that might result in a change
of control of our company.
- 24
-
In
connection with the Transaction, we completed the closing of a private placement
of $3,900,000 in Units, each Unit consisting of one share of our series A
convertible preferred stock and a warrant to purchase one share of our common
stock, to purchasers that qualified as accredited investors, as defined in
Regulation D, pursuant to the terms of a Securities Purchase Agreement, dated as
of February 25, 2010. Each share of series A convertible preferred stock has a
stated value equal to $2.00 per share and is initially convertible at any time
into shares of common stock at a conversion price equal to $2.00 per share or an
aggregate of 1,950,000 shares of common stock, subject to adjustment under
certain circumstances. Each warrant entitles the holder to purchase one share of
common stock (equivalent to 100% warrant coverage in respect of the shares
underlying both the series A convertible preferred stock) at an exercise price
of $2.50 per share through February 25, 2015.
At the
closing, buyers that purchased preferred shares with a stated value of at least
$150,000 received short-term warrants (each, a "Unit Purchase Option") to
purchase, on the same terms as those units sold at the closing, additional Units
of preferred shares and warrants equal to 50% of the units they purchased at the
closing. In the event that any holder of a Unit Purchase Option does not
exercise some or all of such option on or before the 55th day following the
closing, any unexercised portion of such Unit Purchase Option will be offered
and may be purchased (no later than the 60th day following the closing) by each
other holder of a Unit Purchase Option that elects to exercise its Unit Purchase
Option in full. The conversion shares underlying the preferred shares receivable
upon exercise of a Unit Purchase Option and the warrant shares underlying the
warrants receivable upon exercise of a Unit Purchase Option will receive the
same registration rights as those securities underlying the investment units
issued at closing.
In
connection with the private placement, we agreed with investors in the private
placement to file a registration statement with the U.S. Securities and Exchange
Commission covering the resale of 100% of the shares of common stock underlying
the series A convertible preferred stock, and the warrants issued in connection
with the private placement within 120 days after the closing of the private
placement. We are obligated to maintain the effectiveness of the registration
statement from its effective date until all registrable shares covered by the
registration statement have been sold, or may be sold without volume or manner
of sale restrictions under Rule 144. We also agreed to use our best efforts to
have the registration statement declared effective by the SEC as soon as
possible, but in any event within 240 days after the closing of the private
placement (or 270 days if the registration statement receives a full review by
the SEC). In the event the registration statement is not filed with the SEC on
or prior to the 120 th day
after the closing of the private placement or the registration statement is not
declared effective by the SEC on or prior to the 240 th day (or
270 th day, as
applicable) after the closing of the private placement, each named selling
stockholder will be entitled to receive registration default damages in the
amount of 2% of the total purchase price of their securities per month, provided
that the aggregate amount of damages may not exceed 12% of the purchase
price.
Results
of Operation
Fiscal
Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31,
2008
Net
Sales
Our net
sales for the fiscal years ended December 31, 2009 and 2008 were as follows (in
thousands):
Year
|
|
|
Year
|
|
|
|
||||||
|
|
Ended
|
|
|
Ended
|
|
|
|
||||
|
|
December 31,
|
|
|
December 31,
|
|
|
2008 to 2009
|
|
|||
|
|
2009
|
|
|
2008
|
|
|
% Change
|
||||
Net
sales
|
$
|
36,701
|
$
|
17,123
|
114.3%
|
- 25
-
Net sales in fiscal 2009
increased 114.3% from fiscal 2008. The increase in net sales was due to expanded
availability of supply from various channels, an increase in overall consumer
demand due to the expanding nature of the pre-owned industry, and a new
relationship with GameStop where we provide bulk “as-is” shipments of consumer
returns.
Cost
of Sales
Our cost
of sales for the fiscal years ended December 31, 2009 and 2008 were as follows
(in thousands):
Year
|
|
|
Year
|
|
|
|
||||||
|
|
Ended
|
|
|
Ended
|
|
|
|
||||
|
|
December 31,
|
|
|
December 31,
|
|
|
2008 to 2009
|
|
|||
|
|
2009
|
|
|
2008
|
|
|
% Change
|
||||
Cost
of Sales
|
$
|
30,684
|
$
|
13,389
|
129.2%
|
Cost of Sales in
fiscal 2009 increased 129.2% from fiscal 2008. The increase in cost of sales was
due to increased sales volume. Average cost per unit was similar to
2008.
Gross
Profit
Gross
profit is defined as net sales less cost of sales. Cost of sales consists of
product costs, cost of commissions, cost of freight-in, and distribution center
labor and overhead costs.
The
following table presents net sales, cost of sales and gross profit for fiscal
years ended December 31, 2009 and 2008 (in thousands):
Year Ended December 31,
|
|
|
|
|
|
|||||||||||||||||||
|
|
2009
|
|
|
2008
|
|
|
|
|
|
||||||||||||||
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
||||||||
|
|
Amount
|
|
|
Net Sales
|
|
|
Amount
|
|
|
Net Sales
|
|
|
Change
|
|
|
Change
|
|||||||
Net
sales
|
$
|
36,701
|
100.0
|
%
|
$
|
17,123
|
100.0
|
%
|
$
|
19,578
|
114.3
|
%
|
||||||||||||
Cost
of sales
|
30,684
|
83.6
|
%
|
13,389
|
78.2
|
%
|
17,295
|
129.2
|
%
|
|||||||||||||||
Gross
profit
|
$
|
6,017
|
16.4
|
%
|
$
|
3,734
|
21.8
|
%
|
$
|
2,283
|
61.1
|
%
|
Gross profit in fiscal 2009 increased 61.1% from fiscal
2008, and gross profit as a percentage of net sales decreased to 16.4% in fiscal
2009 from 21.8% in fiscal 2008. The decrease in gross profit margin was due to a
high concentration of sales of lower margin “as-is” product. Gross profit margin
was further impacted by a higher cost of sales due to broker fees and other
costs associated with obtaining special credit terms with certain
vendors.
- 26
-
Operating
Expenses
Operating
expenses for fiscal years ended December 31, 2009 and 2008 were as follows (in
thousands):
December 31,
|
|
|
% of
|
|
|
December 31,
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
||||||||
|
|
2009
|
|
|
Net Sales
|
|
|
2008
|
|
|
Net Sales
|
|
|
Change
|
|
|
Change
|
|||||||
Selling,
general and administrative
|
$
|
3,621
|
9.9
|
%
|
$
|
2,651
|
15.5
|
%
|
$
|
970
|
36.6
|
%
|
Selling, general and administrative expenses consist primarily of salaries and benefits
for our executive and administrative personnel, travel expenses, facilities
costs and professional services, such as legal and accounting, outbound freight,
and bad debt expense. Overall expense increased by 36.6% from 2008 to 2009 due
mainly to increased variable costs associated with outbound freight, overflow
facility needs, IT requirements, legal services associated mainly with financing
initiatives, and travel for servicing new accounts. The decrease in expense as a
percent of net sales from 15.5% in 2008 to 9.9% in 2009 is primarily
attributable to economies of scale driving lower proportional increases in
management and administrative payroll, outbound freight, IT and facilities
expenses.
Other
Income (Expense)
Other
income (expense) for fiscal years ended December 31, 2009 and 2008 were as
follows (in thousands):
December 31,
|
|
|
% of
|
|
|
December 31,
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
||||||||
|
|
2009
|
|
|
Net Sales
|
|
|
2008
|
|
|
Net Sales
|
|
|
Change
|
|
|
Change
|
|||||||
Interest
expense
|
$
|
(670
|
)
|
1.8
|
%
|
$
|
(602
|
)
|
3.5
|
%
|
$
|
(68
|
)
|
11.3
|
%
|
|||||||||
Other
income
|
$
|
14
|
0.0
|
%
|
$
|
0
|
0.0
|
%
|
$
|
14
|
n/a
|
|||||||||||||
Discontinued
operations
|
$
|
0
|
0.0
|
%
|
$
|
(145
|
)
|
1.8
|
%
|
$
|
145
|
100.0
|
%
|
Interest expense in fiscal 2009 increased by
11.3% from the prior year despite a lower overall average debt balance,
primarily due to increases in the interest rate on our revolving line of credit.
Other income is a minor amount associated with the elimination of retired
payables. Discontinued operations represents a previous division of the company
that operated retail stores. The operation was discontinued in 2006 with all but
one of the existing store leases terminated. We continue to incur costs
associated with the lease which is guaranteed through 2015.
- 27
-
Provision
for Income Taxes
The
Company has not been required to pay income taxes since 2005 due to losses
associated with the discontinued retail operation in 2006 and the associated net
operating loss carryforwards since 2006.
Liquidity
and Capital Resources
Since
GTTs’ inception, it has financed operations through video game product sales to
customers, debt instruments from institutional investors and existing
shareholders, and short-term debt.
As of
December 31, 2009, GTT had approximately $641,088 in cash and cash equivalents.
We estimate that our existing cash, combined with the proceeds of our recent
private placement, will be sufficient to fund current operations. If our plans
or assumptions change or prove to be inaccurate, we may be required to seek
additional capital through public or private debt or equity financings. If we
need to raise additional funds, we may not be able to do so on terms favorable
to us, or at all. If we cannot raise sufficient funds on acceptable terms, we
may have to curtail our level of expenditures and our rate of
expansion.
Operating
Activities
The
Company generated cash flow from operating activities of $5,290,397 for the year
December 31, 2009. This cash flow is primarily attributable to net income of
$1,740,498 and a significant increase in accounts payable
($3,597,242).
Investing
Activities
The
Company generated a deficit in cash flow from investing activities of $69,456
for the year December 31, 2009. This deficit is primarily attributable to
acquisition of capital equipment for the purpose of operating the
warehouse.
Financing
Activities
The
Company generated a deficit in cash flow from financing activities of $4,881,250
for the year December 31, 2009. This deficit is primarily attributable to
repayment and retirement of various short term and long term debt, including a
$5,000,000 revolving line of credit that was paid down to $1,800,000 and
converted to a 5-year term note.
Off-Balance
Sheet Arrangements
We have
not entered into any transactions with unconsolidated entities in which we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.
- 28
-
Critical
Accounting Policies
Cash
and Cash Equivalents
The
Company periodically maintains cash balances in financial institutions in
amounts greater than the federally insured limit of $100,000. Management
considers this to be an acceptable business risk.
For the
purposes of the Statement of Cash Flows, the Company considers liquid
investments with an original maturity of three months or less to be cash
equivalents.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Fair
value of Financial Instruments
The
Company adopted ASC topic 820, “Fair Value Measurements and Disclosures” (ASC
820), formerly SFAS No. 157 “Fair Value Measurements,” effective January 1,
2009. ASC 820 defines “fair value” as the price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. There was no impact relating to the
adoption of ASC 820 to the Company’s financial statements. ASC 820 also
describes three levels of inputs that may be used to measure fair
value:
• Level 1: Observable inputs
that reflect unadjusted quoted prices for identical assets or liabilities traded
in active markets.
• Level 2: Inputs other than
quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly.
• Level 3: Inputs that are
generally unobservable. These inputs may be used with internally developed
methodologies that result in management’s best estimate of fair
value.
Financial
instruments consist principally of cash, prepaid expenses, accounts payable, and
accrued liabilities. The carrying amounts of such financial instruments in the
accompanying balance sheets approximate their fair values due to their
relatively short-term nature. It is management’s opinion that the Company is not
exposed to any significant currency or credit risks arising from these financial
instruments.
Accounts
Receivable
The
Company extends credit to customers without requiring collateral. The Company
uses the allowances method to provide for doubtful accounts based on
management’s evaluations of the collectability of accounts receivable.
Management’s evaluation is based on the Company’s historical collection
experience and a review of past-due amounts. Based on management’s evaluation of
collectability, there is a $100,000 allowance for doubtful accounts as of
December 31, 2009 and no allowance at December 31, 2008. During the years ended
December 31, 2009 and 2008 the Company wrote off $148,957 and $535,096
respectively as uncollectible accounts receivables. The Company determines
accounts receivable to be delinquent when greater than 30 days past due.
Accounts receivable are written off when it is determined that amounts are
uncollectible.
- 29
-
Inventory
Inventory,
consisting of goods held for resale, is stated at the lower of cost or market.
Cost is determined using the weighted-average method. At December 31, 2009 and
2008, no allowance for the obsolete inventory was deemed necessary based on
management’s estimate of the realizability of the inventory.
Property
and Equipment
Property
and equipment is stated at cost. Depreciation and amortization expense is
computed using principally accelerated methods over the estimated useful life of
the related assets ranging from 3 to 7 years. When assets are sold or retired,
their costs and accumulated depreciation are eliminated from the accounts and
any gain or loss resulting from their disposal is included in the statement of
operations.
The
Company recognizes an impairment loss on property and equipment when evidence,
such as the sum of expected future cash flows (undiscounted and without interest
charges), indicates that future operations will not produce sufficient revenue
to cover the related future costs, including depreciation, and when the carrying
amount of the asset cannot be realized through sale. Measurement of the
impairment loss is based on the fair value of the assets.
Goodwill
Goodwill
represents the excess of the purchase price of certain retail locations in
Tennessee over the fair market value of the net assets acquired. The Company has
adopted Statement of Financial Accounting Standards (SFAS) No. 141 and 142.
These standards changed the accounting for business combinations by, among other
things, prohibiting the prospective use of pooling-of interests accounting and
requiring companies to discontinue the amortization of goodwill and certain
intangible assets with the indefinite useful life created by business
combinations accounted for using the purchase method of accounting. Instead,
goodwill and intangible assets deemed to have an indefinite useful life are
subject to at least an annual review for impairment.
The
impairment test for intangible assets consists of comparing the fair value of
the intangible assets to its carrying amount. If the carrying amount of the
intangible asset exceeds its fair value, an impairment loss is recognized. Fair
value for goodwill and intangible assets are determined based on discounted cash
flows and appraised values.
Impairment
of Long-Lived Assets
The
Company assesses long-lived assets, such as property and equipment and
intangible assets subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
group may not be fully recoverable.
Recoverability
of asset groups to be held and used in measured by a comparison of the carrying
amount of an asset group to estimated undiscounted future cash flows expected to
be generated by the asset group. If the carrying amount exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of an asset group exceeds the fair value of the asset group. The
Company evaluated its long-lived assets and no impairment charges were recorded
for any of the periods presented.
Revenue
Recognition
The
Company will recognize revenue when:
-
Persuasive evidence of an arrangement exists;
-
Shipment has occurred;
- 30
-
- Price
is fixed or determinable; and
-
Collectability is reasonably assured
The
Company closely follows the provisions of Staff Accounting Bulletin No. 104 as
described above. The Company had $36,700,731, and $17,122,540 in revenue for the
years ended December 31, 2009 and 2008, respectively.
Shipping
and Handling Costs
The
Company includes its shipping and handling costs in selling, general and
administrative expenses. Those costs were $573,660 and $369,663 for the years
ended December 31, 2009 and 2008, respectively.
Income
Taxes
Under the
asset and liability method prescribed under ASC 740, Income Taxes , The Company
uses the liability method of accounting for income taxes. The liability method
measures deferred income taxes by applying enacted statutory rates in effect at
the balance sheet date to the differences between the tax basis of assets and
liabilities and their reported amounts on the financial statements. The
resulting deferred tax assets or liabilities are adjusted to reflect changes in
tax laws as they occur. A valuation allowance is provided when it is more likely
than not that a deferred tax asset will not be realized.
The
Company recognizes the financial statement benefit of an uncertain tax position
only after considering the probability that a tax authority would sustain the
position in an examination. For tax positions meeting a "more-likely-than-not"
threshold, the amount recognized in the financial statements is the benefit
expected to be realized upon settlement with the tax authority. For tax
positions not meeting the threshold, no financial statement benefit is
recognized. As of December 31, 2009, the Company has had no uncertain tax
positions. The Company recognizes interest and penalties, if any, related to
uncertain tax positions as general and administrative expenses. The Company
currently has no federal or state tax examinations nor has it had any federal or
state examinations since its inception. All of the Company's tax years are
subject to federal and state tax examination.
Reclassifications
Certain
amounts in the prior period financial statements have been reclassified to
conform to the current year presentation.
Income
(loss) Per Common Share
Basic
income (loss) per share is calculated using the weighted-average number of
common shares outstanding during each reporting period. Diluted loss per share
includes potentially dilutive securities such as outstanding options and
warrants, using various methods such as the treasury stock or modified treasury
stock method in the determination of dilutive shares outstanding during each
reporting period. Common equivalent shares are excluded from the computation of
net loss per share since their effect is anti-dilutive.
Comprehensive
Income (Loss)
The
Company adopted ASC 220, formerly Financial Accounting Board Statement of
Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”,
which establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. There were no items of
comprehensive income (loss) applicable to the Company during periods covered in
the financial statements.
- 31
-
Recent
Authoritative Accounting Pronouncements
FASB
Accounting Standards Codification
(Accounting
Standards Update (“ASU”) 2009-01)
In June
2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the Company’s
financial statements as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. There have
been no changes to the content of the Company’s financial statements or
disclosures as a result of implementing the Codification during the year ended
December 31, 2009.
As a
result of the Company’s implementation of the Codification during the quarter
ended September 30, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current year financial statements,
the Company will provide reference to both new and old guidance to assist in
understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.
Subsequent
Events
(Included in Accounting Standards
Codification (“ASC”) 855 “Subsequent Events”, previously SFAS No. 165 “Subsequent
Events”)
SFAS No.
165 established general standards of accounting for and disclosure of events
that occur after the balance sheet date, but before the financial statements are
issued or available to be issued (“subsequent events”). An entity is required to
disclose the date through which subsequent events have been evaluated and the
basis for that date. For public entities, this is the date the financial
statements are issued. SFAS No. 165 does not apply to subsequent events or
transactions that are within the scope of other GAAP and did not result in
significant changes in the subsequent events reported by the Company. SFAS No.
165 became effective for interim or annual periods ending after June 15, 2009
and did not impact the Company’s financial statements. The Company evaluated for
subsequent events through the issuance date of the Company’s financial
statements. No recognized or non-recognized subsequent events were
noted.
- 32
-
Directors
and Executive Officers, Promoters and Control Persons
The
names, ages and positions of our directors and executive officers as of February
25, 2010, are as follows:
Name
|
Age
|
Position
|
||
Todd
Hays
|
43
|
President,
Chief Executive Officer and Director
|
||
Rodney
Hillman
|
44
|
Chief
Operating Officer and Director
|
||
Thomas
Hays
|
48
|
Vice
President - National Sales
|
The
principal occupations for the past five years (and, in some instances, for prior
years) of each of our directors and executive officers are as
follows:
Todd Hays, our President and
Chief Executive Officer and a member of our Board of Directors, founded Gamers
in 2003 as a solution to the growing need for wholesale distribution
capabilities in the fledgling pre-owned video game industry. Prior to starting
Gamers, Mr. Hays was founder, President and Chief Executive Officer of InterAct
Accessories, Inc. Founded in 1991 and later sold to Recoton Corporation,
InterAct became the world’s largest third-party developer, manufacturer and
distributor of peripherals for video game consoles and computers. InterAct was
the leader in market share for nine years with a peak of 73% in 1999. Under Mr.
Hays’ leadership, the company generated over $1.4 billion in revenue during that
time span, while developing GameShark®, one of the most recognizable brands in
the industry. Mr. Hays received a B.A. degree in Marketing from Pennsylvania
State University.
Rodney Hillman, our Chief
Operating Officer and a member of our Board of Directors, has been the Gamers’
Chief Financial Officer and General Manager from 2003 through the present, and
prior to that was Vice President of Product Development for InterAct
Accessories, Inc. from 1998 through 2003. Mr. Hillman has 12 years prior
experience in various management positions, primarily in finance and strategy,
with Constellation Energy Group, a multinational energy services firm. Mr.
Hillman received a B.S. degree in Electrical and Computer Engineering from The
Johns Hopkins University, an M.S. degree in Finance from Loyola College in
Baltimore, Maryland, and an M.B.A. degree from the University of
Baltimore.
Thomas Hays, our Vice
President - National Sales, manages Gamers’ relationships with its retail
corporate customers and suppliers from which it procures its inventory and
distributes its refurbished products. Prior to Gamers, from 1996 to 2002, Mr.
Hays formed and managed Proactive Marketing, a manufacturers’ representative
agency which sold PC and videogame software and accessories to Wal-Mart,
Hastings Entertainment, Office Max, Office Depot, BJ’s Wholesale Clubs and Micro
Center, as well as various distributors in Latin America. Mr. Hays developed his
sales background during 13 years working in various sales territories and as a
district manager for a division of Alcan Aluminum Corporation. Mr. Hays received
a B.A. degree in Business from Towson University, and an M.B.A. degree from the
University of Baltimore.
- 33
-
All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. Officers are elected annually by
the board of directors and serve at the discretion of the
board.
Board
Committees
We have
not previously had an audit committee, compensation committee or nominations and
governance committee. Within 60 days of the closing the Transaction, we
anticipate that the board of directors will authorize the creation of such
committees, in compliance with established corporate governance
requirements.
Director
Compensation
Directors
are expected to timely and fully participate in all regular and special board
meetings, and all meetings of committees that they serve on. We intend to
compensate non-management directors in the future through an annual grant of
stock options to purchase 50,000 shares of common stock pursuant to the 2009
Stock Incentive Compensation Plan and the payment of a cash fee equal to $2,500
for each board meeting attended and $750 for each committee meeting
attended.
Indebtedness
of Directors and Executive Officers
None of
our directors or executive officers or their respective associates or affiliates
is indebted to us.
Family
Relationships
Todd Hays
is Thomas Hays’ nephew. Other than the Hays’, there are no family relationships
among our directors and executive officers.
Legal
Proceedings
As of the
date of this report, there is no material proceeding to which any of our
directors, executive officers, affiliates or stockholders is a party adverse to
us.
2009
Stock Incentive Plan
The
purpose of our 2009 Stock Incentive Plan (the “2009 Plan”) is to enable us to
attract, retain and motivate key employees, directors and, on occasion,
consultants, by providing them with stock options. Stock options granted under
the 2009 Plan may be either incentive stock options, as defined in Section 422A
of the Internal Revenue Code of 1986, or non-qualified stock options. Pursuant
to the 2009 Plan, stock options to purchase an aggregate of 1,500,000 shares of
common stock may be granted under the 2009 Plan.
- 34
-
In
connection with the Transaction, the Company plans on amending the number of
shares reserved for issuance under the 2009 Plan from 1,500,000 shares to
2,500,000 shares.
Executive
Compensation
Summary Compensation
Table
The
following table provides certain summary information concerning compensation
awarded to, earned by or paid to our Chief Executive Officer and our two other
highest paid executive officers whose total annual salary and bonus exceeded
$100,000 (collectively, our named executive officers) for fiscal year
2009.
Name
& Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Change
in Pension Value and Non-Qualified Deferred Compensation Earnings
($)
|
All
Other Compensation ($)
|
Total
($)
|
||||||||||||||||||||||||
Todd
Hays
|
2009
|
$
|
121,450
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
121,450
|
||||||||||||||||||||||
Chief
Executive Officer
|
2008
|
$
|
74,100
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
74,100
|
Outstanding Equity Awards at
Fiscal Year-End
The
Company’s Named Executive Officers did not hold unexercised options or any other
stock awards as of the end of our years ended December 31, 2009 and 2008,
respectively. As such, the table has been omitted.
On
February 25, 2010, in connection with the Transaction, we issued Todd Hays, our
chief executive officer, options to purchase 325,000 shares of our common stock
with a strike price of $2.25 per share. The option shall vest in equal 1/3
installments on each of the 1 st , 2
nd
and 3 rd
anniversary of the date of issuance.
Employment
Agreements
We
entered into employment agreements with Todd Hays and Rodney Hillman effective
at the closing of the Transaction and private placement. The employment
agreements require each of the executives to devote all of their time and
attention during normal business hours to our business as our Chief Executive
Officer and our Chief Operating Officer, respectively. The employment agreements
provide that each executive will receive an annual salary of $175,000 and
$125,000 per year, respectively. In addition, each executive is entitled to (a)
receive a cash bonus in an amount determined by the compensation committee of
the board of directors if we meet or exceed certain mutually agreed upon
performance goals and (b) participate in our stock option plan.
- 35
-
The
employment agreements provide for termination of an executive’s employment
without any further obligation on our part upon the death or disability of the
executive or for cause. In the event that an executive’s employment is
terminated without cause or for good reason, we are obligated to pay such
executive his salary for the remainder of the term. Termination for cause means
termination as a result of (w) willful and material malfeasance, dishonesty or
habitual drug or alcohol abuse by the executive related to or affecting the
performance of his duties, (x) continuing and intentional breach,
non-performance or non-observance of any of the terms or provisions of the
employment agreement, but only after the failure of the executive to cure the
breach within ten days of receipt of notice from us, (y) conduct which the board
determines could reasonably be expected to have a material adverse effect on us,
but only after the failure of the executive to cease such conduct within ten
days of receipt of notice from us, or (z) the executive's conviction of a
felony, any crime involving moral turpitude related to or affecting the
performance of the executive’s duties or any act of fraud, embezzlement, theft
or willful breach of fiduciary duty against us. Good reason means (i) material
breach of our obligations under the employment agreement, (ii) any decrease in
the executive's salary during the term of the executive’s employment (except for
decreases that are in conjunction with decreases in executive salaries
generally), or (iii) a reduction in their duties or authority inconsistent with
the duties and authority of an executive officer. In the event Todd Hays is
terminated without cause or not for good reason, the Company shall use its best
efforts to remove Mr. Hays from any personal guarantees under financing
arrangements on behalf of the Company or its subsidiaries and/or release any
pledges made by Mr. Hays of his personal property in connection with financing
arrangements on behalf of the Company or its subsidiaries, and, in the event the
Company has not caused such guarantees to be removed or pledges to be released
within six (6) months after the termination date, the Company shall repay and
extinguish the subject financing arrangement.
The
employment agreements also contain covenants (a) restricting the executive from
engaging in any activity competitive with our business during the term of the
employment agreement and in the event of termination for cause or without good
reason, for a period of one year thereafter, (b) prohibiting the executive from
disclosing confidential information regarding us, and (c) soliciting our
employees, customers and prospective customers during the term of the employment
agreement and for a period of one year thereafter.
- 36
-
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the beneficial ownership of our
common stock as of February 25, 2010, by (a) each person who is known by us to
beneficially own 5% or more of our common stock, (b) each of our directors and
executive officers, and (c) all of our directors and executive officers as a
group.
Name
(1)
|
Number of
Shares
Beneficially
Owned
|
Percentage of
Shares
Beneficially
Owned (2)
|
||||||
Todd
Hays (3)
|
4,400,000
|
53.08
|
%
|
|||||
Rodney
Hillman
|
630,000
|
7.6
|
%
|
|||||
John
Hays, Jr.
|
630,000
|
7.6
|
%
|
|||||
Thomas
Hays
|
630,000
|
7.6
|
%
|
|||||
All
directors and executive officers as a group (5 persons)
|
6,290,000
|
75.87
|
%
|
|||||
5%
Shareholders
|
||||||||
Evolution
Corporate Advisors LLC(4)
623
Fifth Avenue, 32nd
Floor
New
York, New York 10022
|
701,250
|
8.36
|
%
|
(1)
|
The
address of each person is c/o Game Trading Technologies, Inc., 10957
McCormick Road, Hunt Valley, Maryland 21031 unless otherwise indicated
herein.
|
(2)
|
The
calculation in this column is based upon 8,290,000 shares of common stock
outstanding on February 25, 2010. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock that are currently exercisable or exercisable
within 60 days of February 25, 2010 are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other
person.
|
(3)
|
Does
not include (i) 50,000 shares of common stock into which the series A
preferred stock are convertible and (ii) 50,000 shares of common stock
into which the warrants are exercisable, which series A preferred shares
and warrants were purchased by Mr. Hays in the private
placement. The holders of our series A convertible preferred
stock and warrants contractually agreed to restrict their ability to
convert the series A preferred stock and exercise the warrants, such that
the number of shares of our common stock held by each of them (and their
affiliates) after such conversion or exercise does not exceed 9.99% of our
then outstanding shares of common
stock.
|
(4)
|
Included
(i) 600,000 shares of common stock held by Evolution Corporate Advisors
LLC and (ii) a warrant to purchase 101,250 shares of common stock held by
Gregg Smith. Gregg Smith has sole voting and dispositive power
over the shares held by Evolution Corporate Advisors LLC. The
securities held by Evolution Corporate Advisors LLC and Mr. Smith are
subject to the terms of the lock-up agreement executed by Mr. Smith in
connection with
the Transaction.
|
- 37
-
Certain
Relationships and Related Transactions
On
December 6, 2007, TW Development LLC, a limited liability company owned by the
GTT shareholders, loaned $500,000 to GTT, primarily to accommodate the expansion
and other financing needs of GTT, pursuant to a promissory note bearing interest
at a rate of 6% per year and initially maturing on April 4, 2008. The note
required no monthly principal or interest payments. During 2008, additional
funds were advanced by TW Development and the maturity date of the note was
extended to December 31, 2009. As of December 31, 2009, the balance of the note
was $408,424, including accrued interest. As of February 25, 2010, the balance
of the note was $452,424, including accrued interest.
On July
7, 2006, Todd Hays loaned $1,000,000 to GTT pursuant to a promissory note
bearing interest at 8.08% and maturing on July 1, 2013. The note required
consecutive monthly payments of principal of $3,333.33, plus interest, with a
balloon payment of $897,698, plus any other outstanding balances, due on the
maturity date. The note was fully paid off and released as of December 31,
2009.
On
December 29, 2009, Gamers ended into a Second Amended and Restated Loan
Agreement by and among Gamers, Todd S. Hays, Whitney A. Hays and The Columbia
Bank (the “Lender”) pursuant to which the Lender agreed to continue to make a
loan in the principal amount of $1,800,000 to Gamers in accordance with the
terms therein. The loan bears interest at a rate of 8% per annum and matures on
December 29, 2014. The principal and interest payments shall be payable in 60
consecutive monthly installments of principal and interest commencing on
February 1, 2010 with one final payment of all remaining principal and accrued
interest due on December 29, 2014. The loan is secured by all of the assets of
Gamers as well as the personal assets of Todd Hays, our chief executive
officer.
Todd Hays
purchased $100,000 in Units in the private placement on the same terms and
conditions as other investors.
- 38
-
Description
of Securities
Common
Stock
Holders
of our common stock are entitled to one vote per share. Our certificate of
incorporation does not provide for cumulative voting. Holders of our common
stock are entitled to receive ratably such dividends, if any, as may be declared
by our board of directors out of legally available funds. However, the current
policy of our board of directors is to retain earnings, if any, for the
operation and expansion of the company. Upon liquidation, dissolution or
winding-up, the holders of our common stock are entitled to share ratably in all
of our assets which are legally available for distribution, after payment of or
provision for all liabilities and the liquidation preference of any outstanding
series A convertible preferred stock. The holders of our common stock have no
preemptive, subscription, redemption or conversion rights.
Series
A Convertible Preferred Stock
Our
series A preferred stock is convertible, at the option of the holder, at any
time into shares of common stock at a conversion price equal to $2.00 per share,
subject to adjustment under certain circumstances, or into an aggregate of
1,950,000 shares of our common stock. The series A preferred stock pays
dividends of 5% per year, payable quarterly in arrears, at our option in cash or
in additional shares of series A preferred stock or, if the shares underlying
the series A preferred stock are registered, common stock. If, at any time after
the effectiveness of our registration statement covering such underlying shares,
our common stock closes in excess of two times the initial preferred stock
conversion price for any 20 out of 30 trading days, then the dividend will be
reduced to zero. The series A preferred stock does not have any voting rights,
except as required by law. Notwithstanding the foregoing, the holders of series
A preferred stock have the exclusive right to select one director (the “series A
director”) or if we have not hired a chief financial officer by May 30, 2010,
the holders of series A preferred stock will have the exclusive right to select
an additional series A director.
The
series A preferred stock will automatically convert into shares of our common
stock in the event we complete a registered underwritten secondary public
offering of at least $10,000,000 in gross proceeds to us at a price per share
equal to two times the then preferred stock conversion price, subject to the
underlying shares of common stock being fully registered with the SEC and
certain customary equity conditions (a “qualified offering”).
The
series A preferred stock ranks senior to any future series of preferred stock.
Each share of series A preferred stock has a stated value equal to $2.00 per
share, and is entitled to receive upon liquidation, in preference to holders of
common stock and the holders of any shares of preferred stock, an amount equal
to 120% of such stated value, plus any accrued but unpaid
dividends.
The
preferred stock conversion price is subject to “full ratchet” anti-dilution
adjustment for subsequent lower price issuances by us for a period of 36 months
from the closing date, as well as customary adjustment provisions for stock
splits, stock dividends, recapitalizations and the like. From and after 36
months from the closing date the conversion price is subject to broad-based
weighted average anti-dilution adjustment.
The
discussion of our series A convertible preferred stock is qualified in its
entirety by reference to the Certificate of Designation, fixing the rights,
powers and privileges of the series A convertible preferred stock, attached as
Exhibit 3.2 to this report.
- 39
-
Warrants
The
warrant included in the equity unit is exercisable for a period of five years
from the date of issuance at an initial exercise price of $2.50 per share,
subject to adjustment under certain circumstances. If the shares of common stock
underlying the warrant are not fully registered with the SEC within 12 months
after the closing date, the holders may exercise the warrant on a cashless
basis. In the event the holders exercise the warrant on a cashless basis, then
we will not receive any proceeds.
The
warrant exercise price is subject to “full ratchet” anti-dilution adjustment for
subsequent lower price issuances by us for a period of 36 months from the
closing date, as well as customary adjustment provisions for stock splits, stock
dividends, recapitalizations and the like.
Discussion
of the warrants issued in the private placement in this report is qualified
entirely by reference to the form of warrant attached as Exhibit 4.1 to this
report.
Unit
Purchase Option
At the
closing, buyers that purchased preferred shares with a stated value of at least
$150,000 received short-term warrants (each, a "Unit Purchase Option") to
purchase, on the same terms as those units sold at the closing, additional Units
of preferred shares and warrants equal to 50% of the units they purchased at the
closing. In the event that any holder of a Unit Purchase Option does not
exercise some or all of such option on or before the 55th day following the
closing, any unexercised portion of such Unit Purchase Option will be offered
and may be purchased (no later than the 60th day following the closing) by each
other holder of a Unit Purchase Option that elects to exercise its Unit Purchase
Option in full. The conversion shares underlying the preferred shares receivable
upon exercise of a Unit Purchase Option and the warrant shares underlying the
warrants receivable upon exercise of a Unit Purchase Option will receive the
same registration rights as those securities underlying the investment units
issued at closing.
Discussion
of the unit purchase option in this report is qualified entirely by reference to
the form of unit purchase option attached as Exhibit 4.2 to this
report.
Indebtedness
On
December 29, 2009, Gamers ended into a Second Amended and Restated Loan
Agreement by and among Gamers, Todd S. Hays, Whitney A. Hays and The Columbia
Bank (the “Lender”) pursuant to which the Lender agreed to continue to make a
loan in the principal amount of $1,800,000 to Gamers in accordance with the
terms therein. The loan bears interest at a rate of 8% per annum and matures on
December 29, 2014. The principal and interest payments shall be payable in 60
consecutive monthly installments of principal and interest commencing on
February 1, 2010 with one final payment of all remaining principal and accrued
interest due on December 29, 2014. The loan is secured by all of the assets of
Gamers as well as the personal assets of Todd Hays, our chief executive
officer.
Discussion
of the unit purchase option in this report is qualified entirely by reference to
the $1,800,000 Second Amended and Restated Promissory Note Second Amended and
Restated Loan Agreement and attached as Exhibits 4.3 and 10.6, respectively, to
this report.
Ownership
Limitation
The
holders of our series A convertible preferred stock and warrants contractually
agreed to restrict their ability to convert the series A preferred stock and
exercise the warrants, such that the number of shares of our common stock held
by each of them (and their affiliates) after such conversion or exercise does
not exceed 9.99% of our then outstanding shares of common stock.
- 40
-
Registration
Rights
We are
obligated to file a registration statement registering the resale of 100% of (i)
the common stock issuable upon conversion of the series A convertible preferred
stock, and (ii) the common stock issuable upon exercise of the warrants
(including the Series A preferred stock and warrants issuable upon exercise of
the Unit Purchase Option). If the registration statement is not filed
within 120 days from the closing date, or declared effective within 240 days
thereafter (270 days if the registration statement receives a full review by the
SEC), we are obligated to pay each named selling stockholder registration
default damages in the amount of 2% of the total purchase price of their
securities per month, provided that the aggregate amount of damages may not
exceed 12% of the purchase price.
Trading
Information
Our
common stock trades in the over-the-counter market and is quoted on the OTC
Bulletin Board under the trading symbol GTMD.OB.
Upon
satisfaction of all necessary initial listing requirements, we intend to apply
to list our common stock on the Nasdaq Capital Market or the NYSE Amex. We
cannot assure you that we will satisfy the initial listing requirements, or that
our shares of common stock will ever be listed on those trading
markets.
Our
series A convertible preferred stock and warrants are not, and will not be,
registered or listed for trading.
Transfer
Agent
The
transfer agent and registrar for our common stock is Island Stock Transfer,
located in St. Petersburg, Florida. We serve as transfer agent for our series A
convertible preferred stock and as warrant agent for our warrants.
Holders
of Record
As
of February 25, 2010, there were approximately 55 holders of record of our
common stock.
Dividends
We
have not paid any dividends on our common stock and we do not intend to pay any
dividends on our common stock in the foreseeable future.
Indemnification
of Directors and Officers
Under
Delaware law, a Delaware corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys’
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe that the
person’s conduct was unlawful.
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In
the case of a derivative action, a Delaware corporation may indemnify any such
person against expenses, including attorneys’ fees, actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification will be made in respect on any
claim, issue or matter as to which such person will have been adjudged to be
liable to the corporation unless, and only to the extent, that the Court of
Chancery of the State of Delaware or any other court in which such action or
suit was brought determines that such person is fairly and reasonably entitled
to indemnity for such expense.
Delaware
law permits a corporation to include in its certificate of incorporation a
provision eliminating or limiting a director’s personal liability to a
corporation or its stockholders for monetary damages for breaches of fiduciary
duty as a director. Delaware Law provides, however, that a corporation cannot
eliminate or limit a director’s liability for (i) any breach of the director’s
duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) the unlawful purchase or redemption of stock or payment
of unlawful purchase or redemption of stock or payment of unlawful dividends; or
(iv) for any transaction from which the director derived an improper personal
benefit. Furthermore, such provision cannot eliminate or limit the liability of
a director for any act or omission occurring prior to the date when such
provision became effective.
Our
certificate of incorporation provides that we will indemnify our directors to
the fullest extent permitted by Delaware law and may indemnify our officers and
any other person whom we have the power to indemnify against any liability,
reasonable expense or other matter whatsoever.
Under
Delaware law, a corporation may also purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person’s status as such, whether or not the corporation would have the power to
indemnify such person against such liability.
We have
entered into separate, but substantively identical, indemnification agreements
with each of our directors and named executive officers. The indemnification
agreements allow us to indemnify each of them to the fullest extent permitted by
Delaware law.
Item
3.02
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Unregistered
Sales of Equity Securities.
|
In
connection with the Transaction, we completed the closing of a private placement
of $3,900,000 in units (each a “Unit” and collectively, the “Units”), each Unit
consisting of one share of our series A convertible preferred stock and a
warrant to purchase one share of our common stock, to purchasers that qualified
as accredited investors, as defined in Regulation D, pursuant to the terms of a
Securities Purchase Agreement, dated as of February 25, 2010. Each share of
series A convertible preferred stock has a stated value equal to $2.00 per share
and is initially convertible at any time into shares of common stock at a
conversion price equal to $2.00 per share or an aggregate of 1,950,000 shares of
common stock, subject to adjustment under certain circumstances. Each warrant
entitles the holder to purchase one share of common stock (equivalent to 100%
warrant coverage in respect of the shares underlying both the series A
convertible preferred stock) at an exercise price of $2.50 per share through
February 25, 2015.
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At the
closing, buyers that purchased preferred shares with a stated value of at least
$150,000 received short-term warrants (each, a "Unit Purchase Option") to
purchase, on the same terms as those units sold at the closing, additional Units
of preferred shares and warrants equal to 50% of the units they purchased at the
closing. In the event that any holder of a Unit Purchase Option does not
exercise some or all of such option on or before the 55th day following the
closing, any unexercised portion of such Unit Purchase Option will be offered
and may be purchased (no later than the 60th day following the closing) by each
other holder of a Unit Purchase Option that elects to exercise its Unit Purchase
Option in full. The conversion shares underlying the preferred shares receivable
upon exercise of a Unit Purchase Option and the warrant shares underlying the
warrants receivable upon exercise of a Unit Purchase Option will receive the
same registration rights as those securities underlying the investment units
issued at closing.
We
received gross proceeds from the private placement of $3,900,000.
Meyers
Associates, L.P., a FINRA registered broker-dealer, was engaged as placement
agent in connection with the private placement. We paid the placement agent a
cash fee in the amount of $80,500 and issued them warrants to purchase 25,000
shares of common stock at $2.50 per share.
Approximately
$702,000 of the net proceeds of the private placement was used by us to repay
outstanding indebtedness on behalf of GTT, as follows:
·
|
$452,000
to Allegiance Capital Limited Partnership to prepay in full Gamers’
subordinated debenture issued in July 2006 to Allegiance Capital, which
bore interest at 12%, would have matured on July 1, 2011, and required
monthly principal and interest
amortization.
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·
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$250,000
to Vision Opportunity Master Fund, Ltd., to prepay in full GTT’s senior
secured promissory note, dated December 23, 2009, which bore interest at
8% per annum and would have matured on June 30,
2010.
|
Approximately
$2,550,000 of the net proceeds of the private placement will be used for working
capital and general corporate purposes, including amounts required to pay
officers’ salaries, ongoing public reporting costs, insurance, office-related
expenses (including equipment and supplies), and other corporate expenses. An
additional $300,000 of the net proceeds has been allocated to investor and media
relations.
The
shares of our common stock issued to former holders of GTT common stock in
connection with the Transaction, and the shares of our series A convertible
preferred stock and warrants issued in the private placement, were exempt from
registration under Section 4(2) of the Securities Act as a sale by an issuer not
involving a public offering or under Regulation D promulgated pursuant to the
Securities Act of 1933. None of the common stock, series A convertible preferred
stock, or warrants, or shares of our common stock underlying such preferred
stock, notes and warrants, were registered under the Securities Act, or the
securities laws of any state, and were offered and sold in reliance on the
exemption from registration afforded by Section 4(2) and Regulation D (Rule 506)
under the Securities Act and corresponding provisions of state securities laws,
which exempts transactions by an issuer not involving any public offering. Such
securities may not be offered or sold in the United States absent registration
or an applicable exemption from the registration requirements and certificates
evidencing such shares contain a legend stating the same.
Following
the closing of the merger and the private placement, the board approved the
grant of stock options to purchase an aggregate of 1,000,000 shares of our
common stock. All securities were issued in reliance on Section
4(2) of the Securities Act of 1933, as amended.
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Item
5.01
|
Change
in Control of Registrant.
|
Please
see Item 2.01 (Completion of Acquisition or Disposition of Assets) of this
current report on Form 8-K, which is incorporated herein by
reference.
Item
5.02
|
Departure
of Directors or Principal Officers; Election of Directors; Appointment of
Principal Officers; Compensatory Arrangements of Certain
Officers.
|
Please
see Item 1.01 (Entry into a Material Definitive Agreement) and Item 2.01
(Completion of Acquisition or Disposition of Assets) of this current report on
Form 8-K, which are incorporated herein by reference.
Item
5.03
|
Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
|
Effective
February 26, 2010, we changed our corporate name to Game Trading Technologies,
Inc. from City Language Exchange Incorporated and our symbol changed from
CLGX.OB to GMTD.OB. We effected the corporate name change by filing a
Certificate of Amendment to our Certificate of Incorporation with the Secretary
of State of the State of Delaware.
In
connection with the Transaction, we amended our by-laws to increase the size of
our board of directors to five members.
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Item
9.01
|
Financial
Statements and Exhibits.
|
(a)
Financial Statements of
Businesses Acquired
The
financial statements of GTT for the years ended December 31, 2009 and December
31, 2008 are incorporated herein by reference to Exhibits 99.1 to this
report.
(b)
Pro Forma Financial
Information
Our
unaudited pro forma condensed combined financial statements as of and for the
year ended December 31, 2009 is incorporated herein by reference to Exhibit 99.2
to this report, and are based on the historical financial statements of the
Company and GTT after giving effect to the Transaction.
In
accordance with Statement of Financial Accounting Standards No. 141, “Business
Combinations” (SFAS 141), and the assumptions and adjustments described in the
accompanying notes to the unaudited pro forma combined condensed financial
statements, GTT is considered the accounting acquiror. Because GTT’ shareholders
as a group retained or received the larger portion of the voting rights in the
combined entity, and GTT’ senior management represents a majority of the senior
management of the combined entity, GTT was considered the acquiror for
accounting purposes and will account for the Transaction as a reverse
acquisition. The acquisition will be accounted for as the
recapitalization of GTT.
Reclassifications
have been made to the company’s historical financial statements to conform to
GTT’s historical financial statement presentation.
The
unaudited pro forma combined condensed financial statements should be read in
conjunction with “Management’s Discussion and Analysis” set forth under Item
2.01 of this report, which disclosure is incorporated herein by reference, and
the historical consolidated financial statements and accompanying notes of GTT
and the company. The unaudited pro forma combined condensed financial
statements are not intended to represent or be indicative of our consolidated
results of operations or financial condition that would have been reported had
the Transaction been completed as of the dates presented, and should not be
taken as representative of the future consolidated results of operations or
financial condition of the company.
(d)
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Exhibits
|
The
exhibits listed in the following Exhibit Index are filed as part of this
report.
2.1
|
Securities
Exchange Agreement, dated as of February 25, 2010, between City Language
Exchange Incorporated, GTT Acquisition Corp. and Gamers Factory, Inc.
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
with the SEC on February 26, 2010 and incorporated herein by
reference)
|
3.1
|
Certificate
of Amendment of Certificate of Incorporation of City Language Exchange
Incorporated (changing name to Game Trading Technologies, Inc.). (filed as
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC
on February 26, 2010 and incorporated herein by
reference)
|
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3.2
|
Certificate
of Designations, Preferences and Rights of Series A Convertible Preferred
Stock of Game Trading Technologies, Inc. (filed as Exhibit 3.2 to the
Company’s Current Report on Form 8-K filed with the SEC on March 2, 2010
and incorporated herein by
reference).
|
3.3
|
By-laws
of Game Trading Technologies, Inc. (filed as Exhibit 3.3 to the Company’s
Current Report on Form 8-K filed with the SEC on March 2, 2010 and
incorporated herein by reference).
|
4.1
|
Form
of Warrant to Purchase Common Stock issued by Game Trading Technologies,
Inc. to investors in the February 2010 private placement. (filed as
Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC
on February 26, 2010 and incorporated herein by
reference).
|
4.2
|
Form
of Unit Purchase Option issued by Game Trading Technologies, Inc. to
investors in the February 2010 private placement (filed as Exhibit 4.2 to
the Company’s Current Report on Form 8-K filed with the SEC on March 2,
2010 and incorporated herein by
reference).
|
4.3
|
$1,800,000
Second Amended and Restated Promissory Note from Gamers Factory, Inc. to
the Order of Columbia Bank, dated December 29, 2009 (filed as Exhibit 4.3
to the Company’s Current Report on Form 8-K filed with the SEC on March 2,
2010 and incorporated herein by
reference).
|
10.1
|
Form
of Securities Purchase Agreement by and among Game Trading Technologies,
Inc. and the investors in the February 2010 private placement. (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
SEC on February 26, 2010 and incorporated herein by
reference)
|
10.2
|
Performance
Milestone Shares Escrow Agreement, dated February 25, 2010, among Game
Trading Technologies, Inc. (formerly City Language Exchange,
Incorporated), Vision Capital Advisors, LLC on behalf of the
Buyers identified in the Securities Purchase Agreement, Greenberg Traurig,
LLP, as escrow agent and Todd Hays, Rodney Hillman, John Hays, Jr., Thomas
Hays and Evolution Advisors, LLC (filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed with the SEC on March 2, 2010 and
incorporated herein by reference).
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10.3
|
Form
of Registration Rights Agreement by and among Game Trading Technologies,
Inc. and the investors in the February 2010 private placement (filed as
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the
SEC on March 2, 2010 and incorporated herein by
reference).
|
10.4
|
Employment
Agreement, dated as of February 25, 2010, between Todd Hays and Game
Trading Technologies, Inc. (filed as Exhibit 10.4 to the Company’s Current
Report on Form 8-K filed with the SEC on March 2, 2010 and incorporated
herein by reference).
|
10.5
|
Employment
Agreement, dated as of February 25, 2010, between Rodney Hillman and Game
Trading Technologies, Inc. (filed as Exhibit 10.5 to the Company’s Current
Report on Form 8-K filed with the SEC on March 2, 2010 and incorporated
herein by reference).
|
10.6
|
Second
Amended and Restated Loan Agreement, dated December 29, 2010 by and among
Gamers Factory, Inc., Todd S. Hays, Whitney A. Hays and The Columbia Bank
(filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed
with the SEC on March 2, 2010 and incorporated herein by
reference).
|
10.7
|
Agreement,
dated April 24, 2009, by and between an affiliate of Gamestop, Inc. and
Gamers Factory, Inc. (filed as Exhibit 10.7 to the Company’s Current
Report on Form 8-K filed with the SEC on March 2, 2010 and incorporated
herein by reference).
|
21.1
|
Subsidiaries
of Game Trading Technologies, Inc. (filed as Exhibit 21.1 to the Company’s
Current Report on Form 8-K filed with the SEC on March 2, 2010 and
incorporated herein by reference).
|
99.1
|
Financial
statements of Gamers Factory, Inc. as of and for the years ended December
31, 2009 and December 31, 2008.
|
99.2
|
Unaudited
pro forma condensed combined financial statements of Gamers Factory, Inc.,
as of and for the fiscal year ended December 31, 2009 and unaudited pro
forma condensed combined Statement of Operations as of and for the year
ended December 31, 2009 and Statement of Operations for the fiscal year
ended December 31, 2009.
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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 hereunto
duly authorized.
GAME
TRADING TECHNOLOGIES, INC.
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||
Date: March
9, 2010
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By:
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/s/
Todd Hays
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Todd
Hays
|
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President
and Chief Executive Officer
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