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EX-31.2 - EXHIBIT 32.1 - CITY LANGUAGE EXCHANGE INCex312.htm
EX-32.1 - EXHIBIT 32.1 - CITY LANGUAGE EXCHANGE INCex321.htm
EX-31.1 - EXHIBIT 31.1 - CITY LANGUAGE EXCHANGE INCex311.htm
EX-32.2 - EXHIBIT 32.2 - CITY LANGUAGE EXCHANGE INCex322.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q/A
(Amendment No. 2)
(Mark One)   
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2010
 
OR
 
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________  to ______________
 
Commission file number:   333-141521
 
Game Trading Technologies, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
20-5433090
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
10957 McCormick Road, Hunt Valley, Maryland
21031
(Address of Principal Executive Offices)  
      (Zip Code)
 
( 410) 316-9900
(Registrant’s Telephone Number, Including Area Code)
 
  City Language Exchange Incorporated, 6021 Roxton Road, Halifax, Nova Scotia, Canada, B3H 1H4
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x   No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨    No   ¨   (not required)
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x
 
As of May 17, 2010, there were 8,290,000 shares of the registrant’s common stock outstanding. 



 
1

 
 

 
 
Game Trading Technologies, Inc.
                                                                                                                                                                TABLE OF CONTENTS
    Page
 
Explanation of Restatements
     
     
 
PART I - FINANCIAL INFORMATION
 
   
4
Item 1. 
Unaudited Financial Statements
 
   
24
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
   
27
Item 3.  
Quantitative and Qualitative Analysis About Market Risk
 
   
27
Item 4T. 
Controls and Procedures
 
     
 
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
29
     
Item 1A. 
Risk Factors
29
     
Item 2.   
Unregistered Sales of Equity Securities and Use of Proceeds
29
     
Item 3.  
Defaults Upon Senior Securities
30
     
Item 4.  
Removed and Reserved
30
     
Item 5.  
Other Information
30
     
Item 6.  
Exhibits
30
     
SIGNATURES
30
 
 


 
2

 
 

 
EXPLANATION OF OUR RESTATEMENT

Game Trading Technologies, Inc. (hereinafter referred to as “us,” “we,” or the “Company”) is filing this Amendment No. 2 on Form 10-QSB/A (the “Second Amendment”) to its Quarterly Report for the quarterly period ended March 31, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on May 17, 2010 (the “Original Report”) as amended on June 7, 2010 (the “First Amendment”) in response to certain issues set forth in our Current Report on Form 8-K filed with the SEC on March 31, 2011 (the “Form 8-K”).   As previously reported on the Form 8-K, we announced that the condensed consolidated financial statements contained in our Quarterly Report on Form 10-Q for the three months ended March 31, 2010, the three and six months ended June 30, 2010 and the three and nine months ended September 30, 2010 required restatement in order to correct errors related to the following:
 
·  
Total stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the period ended March 31, 2010 incorrectly calculated an accelerated stock option vesting for certain employees which consequently impacted amortization of the Stock Compensation (Accounting Standards Codification ("ASC") 718 "Compensation - Stock Compensation") over the remaining vesting period.  Furthermore, the Company reevaluated the historical volatility methodology utilized in the calculation of the employee stock-based compensation and non-employee stock-based compensation to estimate an expected volatility of similar public companies. Lastly, the Company incorrectly recorded the stock compensation as a warrant liability for the period ended March 31, 2010 and the adjustment has been properly reclassified to Additional Paid in Capital.
 
·  
The Company determined it had certain product financing arrangement with a related party under ASC 470-40 Product Financing Arrangements had not been properly recorded and disclosed.
 
·  
The Company determined  a customer order of approximately $124,000 recognized as revenue in the second quarter 2010 Statement of Operations was incorrectly recorded and subsequent restated to revenue for the three months ended March 31, 2010. The Company will increase revenue and accounts receivable by approximately $124,000 and increase the corresponding cost of sales and decrease inventory by approximately $71,000 for the three months ended March 31, 2010.
 
·  
The Company determined it had not properly calculated the costs of sales utilizing the average costs method for three months ended March 31, 2010.  Subsequently, the Statement of operations have been adjusted to reflect an appropriate allocation and the corresponding inventory adjustment has been recorded decreasing the cost of sales and increasing inventory in the amount of approximately $120,000 for the three months ended March 31, 2010.
  
This Second Amendment reflects the restatement of our previously issued consolidated financial statements contained in the Original Report and the First Amendment for the three months ended March 31, 2010.  These adjustments are fully discussed in Note 2 to the condensed consolidated financial statements contained in this Second Amendment.  
 
In addition, we have reclassified our operating expense costs in the condensed consolidated statement of operations for the period ending March 31, 2010 and 2009 to reflect the selling, general and administrative costs, stock compensation expense, and depreciation expense. Furthermore, certain footnotes and financial statement disclosures have been up-dated to provide consistent financial reporting for all quarterly reports in 2010.
 
This Second Amendment speaks only of the original filing date of the Original Report  and the First Amendment and, except for those Items disclosed in this Explanatory Note, is unchanged from the Original Report and the First Amendment. This Second Amendment reflects material subsequent events which occurred after the filing of the Original Report and the First Amendment. You should read this Second Amendment together with our other reports that update and supersede the information contained in this Second Amendment.
 
 

 
 
3

 
PART I   FINANCIAL INFORMATION
 
Item 1.    Financial Statements

Game Trading Technologies, Inc. and Subsidiary
 
Consolidated Balance Sheets
 
   
(As Restated) See Note 2
       
   
(Unaudited)
   
(Audited)
 
   
March 31, 2010
   
December 31, 2009*
 
 
 
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
 
$
300,575
   
$
641,088
 
Accounts Receivable - Net of Allowance of $100,000 as of March 31, 2010
   
5,450,491
     
2,383,688
 
     and December 31, 2009,  respectively
               
Inventories
   
3,894,609
     
2,897,432
 
Prepaid Expenses
   
239,149
     
-
 
                                                                  TOTAL CURRENT ASSETS
   
      9,884,824
     
5,922,208
 
                 
Property and Equipment, net of accumulated depreciation of $327,109 and $246,549 respectively
   
136,037
     
109,984
 
                 
Other Assets
               
Deferred Financing Costs
   
-
     
258,325
 
Other Deferred Expenses
   
39,940
     
-
 
                                                                 TOTAL OTHER ASSETS
   
39,940
     
258,325
 
                 
                                                                     TOTAL ASSETS
 
$
10,060,801
   
$
6,290,517
 
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
               
Current Liabilities
               
Accounts payable
 
$
4,110,302
   
$
3,967,429
 
Accounts payable - related party
   
-
     
285,967
 
Product financing - related party
   
1,091,742
     
-
 
Accrued expenses and other
   
6,494
     
60,534
 
Note Payable - Bridge City Language
   
-
     
250,000
 
Note Payable - S/B note payable - current portion
   
-
     
263,046
 
Note payable - TW development LLC - related party
   
725,286
     
408,424
 
Discontinued Operations-Liablilties
   
63,848
     
88,921
 
                                                                    TOTAL CURRENT LIABILITES
   
5,997,672
     
5,324,321
 
                 
                 
Long Term Liabilities
               
Note Payable - Columbia Bank
   
1,443,344
     
1,800,000
 
Subordinated Note Payable
   
     
700,000
 
Warrant Redemption Liability
   
-
     
281,935
 
less: Current Maturities of long term debt
   
-
     
(263,046
)
                 
                                                                    TOTAL LONG TERM LIABILITES
   
1,443,344
     
2,518,889
 
  
               
                                                                     TOTAL LIABILITIES
   
7,441,016
     
7,843,210
 
                 
 Redeemable preferred stock, Series A; $.0001 par value, 1,950,000 shares authorized, 1,950,000 and
0 shares issued and outstanding at March 31, 2010 and 2009, respectively, net (Face value $3,900,000 and $0, respectively.
   
83,958 
         
                 
Stockholders' deficit
               
                 
Preferred stock, $0.0001 par value, 18,050,000 shares authorized,
               
      none issued and outstanding as of March 31, 2010 and December 31, 2010 respectively
   
-
     
-
 
Common stock, $0.0001 par value, 100,000,000 shares authorized, 8,290,000 and 7,090,000 shares
               
 issued and outstanding at March 31, 2010 and December 31, 2009, respectively
   
829
     
709
 
Additional paid-in capital
   
5,817,055
     
89,659
 
Accumulated deficit
   
(3,282,057
)
   
(1,643,061
)
                                                                     Total stockholders' equity (deficit)
   
2,535,827
     
(1,552,693
)
                 
                                                                     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
$
10,060,801
   
$
6,290,517
 
                 
* Derived from audited financial statements
 
The accompanying notes are integral parts of these financial statements.
   



 
4

 

Game Trading Technologies, Inc. and Subsidiary
 
Consolidated Statements of Operations
 
(Unaudited)
 
             
   
For the Three Months Ended March 31
 
   
2010
   
2009
 
   
(As Restated) See Note 2
       
Net Sales
  $ 11,525,287     $ 8,341,060  
Cost of Sales
    9,921,353       6,899,492  
Gross Profit
    1,603,934       1,441,568  
                 
Operating Expense :
               
Selling, general and administrative
    1,334,705       620,135  
Employee stock based compensation
    286,032       -  
Non-employee stock based compensation
    1,579,689       -  
Depreciation
    24,064       16,270  
Total Operating Expense:
    3,224,490       636,405  
                 
Income (Loss) From Operations
    (1,620,556 )     805,163  
                 
Other Income (Expense):
               
Interest Expense
    (64,934 )     (143,873 )
Other income
    46,493       -  
Total Other Expense
    (18,441 )     (143,873 )
                 
Income (Loss) From Continuing Operations Before Income Taxes
    (1,638,997 )     661,290  
                 
Provision for income taxes
    -       -  
                 
Income (Loss) From Continuing Operations
    (1,638,997 )     661,290  
                 
Discontinued Operations :
               
Loss From Discontinued Operations
    -       33,156  
                 
Net Income / (Loss)
  $ (1,638,997 )   $ 628,134  
                 
Preferred Dividend Payable
    18,958       -  
 Beneficial Conversion and Warrant
    65,000       -  
Net Income / (Loss) Attributable to Common Stockholders
  $ (1,722,955 )   $ 628,134  
                 
                 
                 
Income (loss) per share from continuing operations – basic & diluted
  $ (0.23 )   $ 0.08  
                 
Income (loss) per share from discontinued operations – basic & diluted
  $ -     $ 0.01  
                 
Net income (loss) per share – basic & diluted
  $ (0.23 )   $ 0.09  
                 
Weighted average shares outstanding of common stock
               
Basic & Diluted
    7,543,333       7,090,000  
   
The accompanying notes are integral parts of these financial statements.
 


 
 
5

 


Game Trading Technologies, Inc. and Subsidiary
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
             
   
For the Period Ended March 31,
 
   
2010
   
2009
 
Cash flows from operating activities
 
(As Restated)
See Note 2 
       
 Net Income (Loss)
 
$
(1,638,997
)
 
$
628,134
 
                 
 Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
 Depreciation & Amortization  - Property and Equipment
   
24,064
     
16,270
 
 Issuance of Stock Warrants for Services
   
1,579,689
     
-
 
 Stock Options for employee services
   
286,032
     
-
 
Changes in assets and liabilities
               
 Account receivable
   
(3,066,803
)
   
(1,805,570
)
Inventory
   
(997,177
)
   
584,302
 
 Accounts payable
   
(143,094
   
1,171,013
 
 Accrued liabilities
   
(54,040
)
   
(4,609
 Deferred Expenses
   
(17,960
   
-
 
 Prepaid expenses and deposits
   
(239,149
)
   
(5,597
)
 Liabilities of discontinued operation
   
(25,073
)
   
-
 
                 
 Net Cash Provided (Used) In Operating Activities
   
(4,292,508
)
   
583,943
 
                 
 Cash flows from investing activities
               
 Purchases of fixed assets
   
(49,953
)
   
-
 
                 
 Net Cash Provided (Used) In Investing Activities
   
(49,953
)
   
-
 
                 
 Cash flows from financing activities
               
Proceeds from the sale of convertible preferred stock
   
3,900,000
     
-
 
Net borrowings (repayment) in connection with Product financing facilities
   
1,091,742
     
-
 
Payments on subordinated note payable
   
(700,000
)
   
(56,250
)
Advance (Repayment) of due to stockholder
   
-
     
(35,000
)
Issuance (Repayment) of note payable-TW development-related party
   
316,862
     
(156,107
)
Issuance (Repayment) of note payable
   
(606,656
)
   
-
 
                 
 Net Cash Provided (Used) In Financing Activities
   
4,001,948
     
(247,357
)
                 
 Net increase (decrease) in cash
   
(340,513
)
   
396,586
 
                 
 Cash and cash equivalents at the beginning of the period
   
641,088
     
301,397
 
                 
 Cash and cash equivalents at the end of the period
 
$
300,575
   
$
637,983
 
                 
Supplemental disclosure of cash flow information :
               
                 
Cash paid for interest
 
$
64,934
   
$
143,873
 
                 
Cash paid for taxes
   
-
     
-
 
 
 
 
 
The accompanying notes are integral parts of these financial statements.



 
6

 
 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010


1.                 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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 “GTTI”) 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.
  
The transactions contemplated by the Exchange Agreement are being accounted for as a “reverse acquisition,” since the stockholders of Gamers owned 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 for the right of the holders of our series A convertible preferred stock, as a class, to elect one of our directors, 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.

In connection with the closing of the Exchange Agreement, we completed the closing of a private placement (referred to herein as the “February 2010 private placement”) of $3,900,000 of units (each, a “Unit” and collectively, the “Units”) pursuant to the terms of a Securities Purchase Agreement, dated as of February 25, 2010, with each Unit consisting of one share of our series A convertible preferred stock and a warrant to purchase one share of our common stock.  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 our 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 the series A convertible preferred stock) at an exercise price of $2.50 per share through February 25, 2015.

At the closing of the February 2010 private placement, buyers that purchased shares of our series A convertible preferred stock with a stated value of at least $150,000 received a unit purchase option (the “Unit Purchase Option”) to purchase, on the same terms as those Units sold at the closing of the February 2010 private placement, additional Units of series A convertible preferred stock and warrants equal to 50% of the Units they purchased at the closing of the February 2010 private placement. In the event that any holder of a Unit Purchase Option does not exercise some or all of such option on or before April 21, 2010 , any unexercised portion of such Unit Purchase Option will be offered and may be purchased (no later than April 26, 2010 ) by each other holder of a Unit Purchase Option that elects to exercise its Unit Purchase Option in full. The shares of common stock underlying the securities issuable upon exercise of a Unit Purchase Option are entitled to the same registration rights as those securities underlying the Units issued at the closing of the February 2010 private placement.
 
Game Trading Technologies, Inc. is a leading provider of comprehensive trading solutions and services for video game retailers, publishers, rental companies, and consumers.  Through our trading platform, we provide our customers with extensive services including valuation, procurement, refurbishment, and merchandising of pre-owned video games.  Additionally, through our trading platform, we process and market video game consoles, DVDs, and video game accessories, and provide related e-commerce retailing and interactive marketing services.
 

 
7

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010



Basis of Presentation

Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the Unites States of America, have been condensed or omitted.  It is suggested that these consolidated condensed financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2009 filed by the Company.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim financial information have been included.  The results of operations for any interim period presented herein are not necessarily indicative of the results of operations for the year ended December 31, 2010.

The consolidated condensed financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America.

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated condensed financial statements is as follows:

Principle of Consolidation

The consolidated condensed financial statements include the accounts of Game Trading Technologies, Inc. and its subsidiary.  Intercompany transactions and balances have been eliminated.  Equity investments in which the Company exercises significant influence but do not control and are not the primary beneficiary are accounted for using the equity method.  Investments in which the Company is not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.

Management’s Use of Estimates and Assumptions

The preparation of the consolidated condensed financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated condensed financial statements, and the reported amounts of revenue and expense during the reporting periods.   Actual results may differ from those estimates and assumptions.

Reclassifications

Certain amounts reported in previous period have been reclassified to conform to the Company’s current period presentation.

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.
 
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 March 31, 2010 and December 31, 2009 respectively.  During the three months ended March 31, 2010 and the year ended December 31, 2009, the Company wrote off $0 and $148,957 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.



 
8

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010




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 March 31, 2010 and December 31, 2009, no allowance for 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.

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

Included in Accounting Standards Codification (“ASC”) 650 “Revenue Recognition”

The Company recognizes revenue based on Account Standards Codification (“ASC”) 605 “Revenue Recognition” which contains Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements’ and No. 104, “Revenue Recognition”. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, shipment has occurred, price is fixed or determinable and collectability of the resulting receivable is reasonably assured.  The Company had $11,525,287 and $8,341,060 in revenue for the three months ended March 31, 2010 and the three months ended March 31, 2009, respectively.

Shipping and Handling Costs

The Company includes its outbound shipping and handling costs in selling, general and administrative expenses.  Those costs were $245,751 and $131,684 for the three months ended March 31, 2010 and 2009, respectively.  Inbound shipping and handling costs are included as an allocation to inventory.  Those costs were $82,568 and $213,779 for the three months ended March 31, 2010 and 2009, respectively.

Share Based Expenses

ASC 718 "Compensation - Stock Compensation" , codified in SFAS No. 123, prescribes that accounting and reporting standards for all stock-based payments award to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights, may be classified as either equity or liabilities. The Company should determine if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if:

a)  
the option to settle by issuing equity instruments lacks commercial substance or
 
b)  
the present obligation is implied because of an entity's past practices or stated policies. If a present obligation exists, the transaction should be recognized as a liability; otherwise, the transaction should be recognized as equity.
 


 
9

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010

 
The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50 "Equity - Based Payments to Non-Employees"   which codified SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"),  "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services".  Measurement of share-based payment transactions with non-employees shall be based on the fair value of whichever is more reliably measurable:
 
a)  
the goods or services receive or
 
b)  
the equity instruments issued.
 
The fair value of the share-based payment transaction should be determined at the earlier of performance commitment date or performance completion date.

Fair value of Financial Instruments

The Company adopted ASC topic 820, “Fair Value Measurements and Disclosures” , 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.

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 March 31, 2010, 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.


 
10

 

GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010


Discontinued Operations

Accounting for the Impairment or Disposal of Long-Lived Assets, the Company classifies a business that has been disposed as a discontinued operation if the cash flow of the business has been eliminated from the ongoing operations and will no longer have any significant continuing involvement in the Company.  The results of operations of discontinued operations through the date of sale, including any gains or losses on disposition, are aggregated and presented as one line in the consolidated statements of operations.   ASC 360-10-05 , formerly SFAS No. 144 requires the classification of amounts presented for prior years as discontinued operations.  The amounts presented in the statements of operations for the three months ended March 31, 2010 and 2009 were classified to comply with ASC 360-10-05 .

During the year ended December 31, 2006, the Company decided to discontinue operations of Planet Replay, LLC, a retail affiliate of the Company, and sell or liquidate the assets of the discontinued operations.  The decision to discontinue the operations of Planet Replay, LLC was based upon the historical and continuing losses of Planet Replay, LLC.  All assets were disposed during 2007 and liabilities of $63,848 and $88,921 existed at March 31, 2010 and December 31, 2009. The Company recognized a loss from discontinued operations totaling $0 and $144,828 for the years ended December 31, 2009 and 2008, respectively. The assets and liabilities of the discontinued operation are presented separately under captions “Assets of discontinued operation” and “Liabilities of discontinued operation,” respectively, in the accompanying consolidated balance.

Abandoned Leased Facilities

In December 2006, the Company’s affiliate, Planet Replay LLC, abandoned its retail locations in Tennessee and Maryland. Although the Company remains obligated under the terms of these leases for the rent and other costs associated with these leases, the Company made the decision to cease using these spaces on December 31, 2006, and has no foreseeable plans to occupy them in the future (see commitment footnote).  Therefore, in accordance with ASC 420, Exit or Disposal Cost Obligations , formerly FASB Statement of Financial Accounting Standards No. 146,  Accounting for Costs Associated with Exit or Disposal Activities , the Company recorded a charge to earnings of approximately $297,274 to recognize the costs of exiting the space. The liability is equal to the total amount of rent and other direct costs for the period of time space is expected to remain unoccupied.  The Company also recorded a charge to earnings of $100,000 for estimated general and administrative costs related to exiting the retail locations. Total exit costs expected to be incurred of $397,274 were recorded as a liability of discontinued operations and included in loss from discontinued operations as of December 31, 2006.  As of March 31, 2010 and December 31, 2009 a liability has been recorded of $63,848 and 88,921.

To determine the lease cost, which is the Company’s loss after its cost recovery efforts from subleasing a building, certain estimates were made related to the (1) time period over which the relevant building would remain vacant, (2) sublease terms, and (3) sublease rates, including common area charges. If market rates continue to decrease in these markets or if it takes longer than expected to sublease these facilities, the actual loss could exceed this estimate.
 
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.

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.


 
 
11

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010




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.


2. Restatement of Financial Statement
 
We have restated our previously issued condensed consolidated financial statements as of and for the three months ended March 31, 2010 to correct errors and reclassifications in the accounting for the following:
 
·  
Total stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the period ended March 31, 2010 incorrectly calculated an accelerated stock option vesting for certain employees which consequently impacted amortization of the Stock Compensation (Accounting Standards Codification ("ASC") 718 "Compensation - Stock Compensation") over the remaining vesting period.  Furthermore, the Company reevaluated the historical volatility methodology utilized in the calculation of the employee stock-based compensation and non-employee stock-based compensation to estimate an expected volatility of similar public companies 1. Lastly, the Company incorrectly recorded the stock compensation as a warrant liability for the period ended March 31, 2010 and the adjustment has been properly reclassified to Additional Paid in Capital.
 
·  
The Company determined it had certain product financing arrangement with a related party under ASC 470-40 Product Financing Arrangements had not been properly recorded and disclosed. In January 2010, the Company entered into a reseller agreement with DK Trading to procure, purchase and sell up to $1.0 million of pre-owned video games through April 2010. The previous filed 10Q omitted the disclosures relating to the transaction and the corresponding balance due of $1,091,742,to DK Trading at March 31, 2010 was reclassified from Accounts Payable to Product Financing -Related Party on the Condensed Consolidated Balance Sheet.
 
·  
The Company determined  a customer order of approximately $124,000 recognized as revenue in the second quarter 2010 Statement of Operations was incorrectly recorded and subsequent restated to revenue for the three months ended March 31, 2010. The Company will increase revenue and accounts receivable by approximately $124,000 and increase the corresponding cost of sales and decrease inventory by approximately $71,000 for the three months ended March 31, 2010. 
 
·  
The Company determined it had not properly calculated the costs of sales utilizing the average costs method for three months ended March 31, 2010.  Subsequently, the Statement of operations have been adjusted to reflect an appropriate allocation and the corresponding inventory adjustment increased the cost of sales and decreased inventory in the amount of approximately $422,000 for the three months ended March 31, 2010.
 
·  
We previously classified  the February 25, 2010, the $3.9 million sale of 1,950,000 shares of Series A Preferred Stock with attached warrants to the equity section of the Condensed Consolidated Balance Sheet. Since the Series A Preferred Stock may ultimately be redeemable at the option of the holder, the carrying value of the preferred stock, net of discount and accumulated dividends, has been reclassified as temporary equity on the balance sheet at March 31, 2010. Furthermore, the Company reevaluated the historical volatility methodology utilized in the calculation of the debt proceeds in accordance with ASC 470 Topic “ Debt" to estimate an expected volatility of similar public companies1.
 
 


 
1 Interpretive Response to Question 5 under Staff Accounting Bulletin (SAB) 107.
 
 

 
12

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010


The following tables summarize the effect of the restatement on the specific items presented in our historical consolidated financial statements included in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2010:
 

 
Game Trading Technologies, Inc.
 
Consolidated Balance Sheets
 
   
As Originally Reported
         
As Restated
 
   
March 31, 2010
    Adjustment    
March 31, 2010
 
ASSETS
                 
                   
Current Assets
                 
Cash and cash equivalents
  $ 300,575     $ -     $ 300,575  
Accounts Receivable, net
    5,326,491       124,000       5,450,491  
Inventories
    4,387,311       (492,702 )     3,894,609  
Prepaid Expenses
    239,149       -       239,149  
                                                                  TOTAL CURRENT ASSETS
    10,253,526       (368,702 )     9,884,824  
                         
Property and Equipment, net
    136,037       -       136,037  
Other Assets
    39,940       -       39,940  
                         
                                                                     TOTAL ASSETS
  $ 10,429,503     $ (368,702 )   $ 10,060,801  
                         
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
                       
Current Liabilities
                       
Accounts payable
  $ 5,202,044     $ (1,091,742 )   $ 4,110,302  
Product financing - related party
    -       1,091,742       1,091,742  
Accrued expenses and other
    6,494       -       6,494  
Note payable - TW development LLC - related party
    725,286       -       725,286  
Discontinued Operations-Liablilties
    63,848       -       63,848  
                                                                    TOTAL CURRENT LIABILITES
    5,997,672       -       5,997,672  
                         
Long Term Liabilities
                       
Note Payable - Columbia Bank
    1,443,344       -       1,443,344  
Warrant Redemption Liability
    3,346,998       (3,346,998 )     -  
                         
                                                                    TOTAL LONG TERM LIABILITES
    4,790,342       (3,346,998 )     1,443,344  
  
                       
                                                                     TOTAL LIABILITIES
    10,788,014       (3,346,998 )     7,441,016  
                         
 Redeemable preferred stock, Series A
    195       83,763       83,958  
                         
Stockholders' Equity (Deficit)
                       
 Preferred Stock
    -       -       -  
 Common stock
    829       -       829  
Additional paid-in capital
    3,110,369       2,706,686       5,817,055  
Accumulated deficit
    (3,469,904 )     187,847       (3,282,057 )
                                                                     Total stockholders' equity
    (358,706 )     2,894,533       2,535,827  
                         
                                                                     TOTAL LIABILITIES AND STOCKHOLDERS'
  $ 10,429,503     $ (368,702 )   $ 10,060,801  
                         
 
 
 
13

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010


Game Trading Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
 
 
 
 
 
             
 
 
For the Three Months Ended March 31
 
   
2010
         
2010
 
   
As Originally
Reported
    Adjustment    
As Restated
 
                   
Net Sales
  $ 11,401,287       124,000     $ 11,525,287  
Cost of Sales
    9,428,651       492,702       9,921,353  
Gross Profit
    1,972,636       (368,702 )     1,603,934  
 
                       
Operating Expense :
                       
Selling, general and administrative
    1,399,639       (64,934 )     1,334,705  
Employee stock based compensation
    945,204       (659,172 )     286,032  
Non-employee stock based compensation
    1,496,024       83,665       1,579,689  
Depreciation
    24,064       -       24,064  
Total Operating Expense:
    3,864,931       (640,441 )     3,224,490  
 
                       
Income (Loss) From Operations
    (1,892,295 )     271,739       (1,620,556 )
 
                       
Other Income (Expense):
                       
Interest Expense
    -       (64,934 )     (64,934 )
Other income
    46,493       -       46,493  
Total Other Expense
    46,493       (64,934 )     (18,441 )
 
                       
Net Income (Loss) From Continuing Operations Before Income Taxes
    (1,845,802 )     206,805       (1,638,997 )
Accretion of preferred dividends and discount
    18,958       -       18,958  
Accretion of preferred amortization of beneficial conversion and warrant features
    -       65,000       65,000  
 
                       
Net Income / (Loss) Attributable to Common Stockholders
  $ (1,864,760 )   $ 141,805     $ (1,722,955 )
 
                       
                         
Net income (loss) per share – basic & diluted
  $ (0.36 )           $ (0.23 )
 
                       
Weighted average shares outstanding of common stock
                       
Basic & Diluted
    5,145,833               7,543,333  

 
 
 
14

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010




Game Trading Technologies, Inc.
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
                   
   
For the Period Ended March 31,
 
   
2010
         
2010
 
 Cash flows from operating activities
 
As Originally Reported
    Adjustment    
As Restated
 
 Net Income (Loss)
  $ (1,845,802 )   $ 206,805     $ (1,638,997 )
     Accretion of Peferred Dividends     (18,958     18,958       -  
 Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
                       
 Depreciation & Amortization  - Property and Equipment
    24,064       -       24,064  
 Issuance of Stock Warrants for Services
    1,496,023       83,665       1,579,689  
 Stock Options for employee services
    929,874       (643,842     286,032  
Changes in assets and liabilities
                       
 Account receivable
    (2,942,803 )     (124,000     (3,066,803 )
Inventory
    (1,489,879 )     492,702       (997,177 )
 Accounts payable
    948,648       (1,091,742     (143,094 )
 Accrued liabilities
    (54,040 )     -       (54,040 )
 Deferred Expenses
    39,940       (57,900     (17,960 )
 Prepaid expenses and deposits
    (239,149 )     -       (239,149 )
 Liabilities of discontinued operation
    (25,073 )     -       (25,073 )
                         
 Net Cash Provided (Used) In Operating Activities
    (3,177,155 )     (1,115,353     (4,292,508 )
                         
 Cash flows from investing activities
                       
 Purchases of fixed assets
    (49,953 )     -       (49,953 )
                         
 Net Cash Provided (Used) In Investing Activities
    (49,953 )     -       (49,953 )
 Cash flows from financing activities
                       
Proceeds from the sale of convertible preferred stock
    3,900,000       -       3,900,000  
Net borrowings (repayment) in connection with Product financing facilities
    -       1,091,742       1,091,742  
Deferred financing, net
    (23,611     23,611       -  
Payments on subordinated note payable
    (700,000 )     -       (700,000 )
Issuance (Repayment) of note payable-TW development-related party
    316,862       -       316,862  
Issuance (Repayment) of note payable
    (606,656 )     -       (606,656 )
                         
 Net Cash Provided (Used) In Financing Activities
    2,886,595       1,115,353       4,001,948  
                         
 Net increase (decrease) in cash
    (340,513 )     -       (340,513 )
                         
 Cash and cash equivalents at the beginning of the period
    641,088       -       641,088  
                         
 Cash and cash equivalents at the end of the period
  $ 300,575     $ -     $ 300,575  
                         

 
 
15

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010


 
3.                 PROPERTY AND EQUIPMENT

Property and equipment consists of the following at March 31, 2010 and December 31, 2009.

   
3/31/10
   
12/31/09
 
Machinery and equipment
 
$
305,183
   
$
251,347
 
Leasehold improvements
   
16,653
     
19,483
 
Computer equipment and software
   
142,641
     
142,223
 
   
$
464,477
   
$
413,053
 
Less accumulated depreciation and amortization
   
328,440
     
303,069
 
Property and Equipment, net
 
$
136,067
   
$
109,984
 
 
Depreciation and amortization expense for the three months ended March 31, 2010 and 2009 totaled $24,064 and $16,032, respectively.


4.           ACCOUNTS PAYABLE - RELATED PARTY

In 2009, the Company entered into certain agreements with DK Trading Partners, LLC (“DK Trading”), a related party, pursuant to which DK Trading earned a referral fee commission from the Company for 50% of the net profit earned on a one-time transaction in the amount of $285,967. The fee was payable as of December 31, 2009 and paid in 2010. See Note 12 Related Party Transactions.   


5.
PRODUCT FINANCING - RELATED PARTY
 

 
 
Obligations and Commitments under Product Financing Arrangement
 

 
 
In 2010 and 2009, the Company entered into numerous product financing arrangement with a related party under ASC 470-40 Product Financing Arrangements. Accordingly, the remaining inventory and the related short-term debt have been included in the Balance Sheet at March 31, 2010 and the corresponding costs have been included in Statement of Operations as Cost of Sales. The Company is obligated to pay the vendor under this product financing arrangement upon its receipt of payments from financed  products.
 
On January 27, 2010, Gamers entered into a reseller agreement (the “2010 Reseller Agreement”) with DK Trading pursuant to which DK Trading engaged Gamers to procure, purchase and sell up to $1,000,000 of pre-owned video games and associated packaging materials, together with such other merchandise as designated by DK Trading, on behalf of DK Trading for a period from January 27, 2010 until April 26, 2010. In consideration for the services to be performed by Gamers under the 2010 Reseller Agreement, Gamers was entitled to receive 50% of the net profit, if any, from the sale of products procured by DK Trading with the assistance of Gamers in excess of $80,000. The Company paid DK Trading $95,000 in accordance with the agreement. In addition, the Company agreed to reduce the exercise price of 405,000 warrants issued to DK Trading from $2.50 to $.65. Furthermore, Mr. Hays, the Company's President and Chief Executive Officer provided a personal guaranty in favor of DK Trading through the agreement period April 26, 2010. The balance due to DK Trading at March 31, 2010 amounted to $1,091,742.

On January 26, 2009, Gamers entered into a Reseller Agreement (the “2009 Reseller Agreement”) with DK Trading pursuant to which DK Trading engaged Gamers to procure, purchase and sell up to $1,000,000 of pre-owned video games and associated packaging materials, together with such other merchandise as designated by DK Trading, on behalf of DK Trading for a period from January 26, 2009 until May 26, 2009. In consideration for the services to be performed by Gamers under the 2009 Reseller Agreement, Gamers was entitled to receive 25% of the net profit, if any, from the sale of products procured by DK Trading with the assistance of Gamers in excess of $250,000. The Company paid DK Trading $250,000 in accordance with the agreement. In addition, the Company agreed to issue 405,000 warrants at an exercise price of $2.50 to DK Trading.
 
 
 
 
16

 

 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010


6.                 NOTES PAYABLE

Subordinated Note Payable

Effective July 25, 2006, the Company entered into a financing agreement issuing a debenture to Allegiance Capital Limited Partnership in the amount of $1,000,000.  This debenture was retired utilizing proceeds from the February 2010 private placement transaction.

Note Payable-Columbia Bank

On December 29, 2009 the Company issued a note payable of $1,800,000 to Columbia Bank. The note bears interest at 8.0% and matures on December 29, 2014.  The note requires consecutive monthly payments of principal and interest of $15,055.92 with a balloon payment due on December 29, 2014.  The borrower may repay this note at any time, in whole or in part, without penalty or additional interest.  The note is collateralized by substantially all assets of the Company and personal assets of the majority shareholder.  The balance as of March 31, 2010 was $1,443,344.

Note Payable-City Language Exchange Incorporated

On December 22, 2009 the Company issued a note payable of $250,000. The note bears interest at 8.0% and matures on June 30, 2010.  The note requires a payment of principal and interest due on June 30, 2010.  The borrower may repay this note at any time, in whole or in part, without penalty or additional interest.  This note is not collateralized.  This note was retired utilizing proceeds from the February 2010 private placement transaction.



 
 
17

 

GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010



Note Payable – TW Development LLC

On December 6, 2007 the Company issued a note payable of $500,000 to TW Development LLC, a related parted.  The note bears interest at 6% and matured on April 4, 2008, at which point it was extended to December 31, 2009.  The note requires no monthly payments.   The borrower may repay this note at any time, in whole or in part, without penalty or additional interest.  During the first quarter of 2010, additional funds were advanced by the related party and the note was extended to December 31, 2010. The balance as of March 31, 2010 was $725,286.

7. 
REDEEMABLE PREFERRED STOCK
 
A summary of the Redeemable Preferred Stock at March 31, 2010 and December 31, 2009 is as follows:
 
   
3/31/10
   
12/31/09
 
Redeemable preferred stock, Series A
 
$
3,900,000
   
$
-
 
Beneficial conversion feature, net of accumulated amortization of $24,255and $0 at March 31, 2010 and December 31, 2009, respectively.
   
(1,431,016
   
-
 
Value attributable to warrants attached to notes, net of accumulated amortization of $40,745 and $0 at March 31, 2010 and December 31, 2009, respectively.
   
(2,403,984
   
-
 
Accumulated Dividends
   
18,958
     
-
 
   
$
83,958
   
$
-
 


We are authorized to issue up to 20,000,000 shares of preferred stock, par value $0.0001 per share. As of March 31, 2010, 3,000,000 shares of our Series A Preferred Stock par value $0.0001 per share were authorized, with 1,950,000 shares designated as Series A Preferred Stock, and 1,950,000 shares issued and outstanding. The rights and preferences of the Series A Preferred Stock include, among other things, the following:
 
 
·
liquidation preferences (120% of stated value);

 
·
dividend preferences;

The Series A Preferred Stock provides an annual dividend of 5% payable quarterly in arrears in cash or stock.  Each share of Series A Preferred Stock is convertible, at the option of the holder thereof, at any time, into one share of the Company’s common stock at an initial conversion price of $2.00 per share, subject to adjustments for anti-dilution provisions.

On February 25, 2010, the Company sold 1,950,000 shares of Series A Preferred Stock with attached warrants to purchase an aggregate of 1,950,000 shares of the Company’s common stock at $2.00 per share. The Company received $3,900,000 from the sale of the shares of the Series A Preferred Stock. Since the Series A Preferred Stock may ultimately be redeemable at the option of the holder, the carrying value of the preferred stock, net of discount and accumulated dividends, has been classified as temporary equity on the balance sheet at March 31, 2010.

In accordance with ASC 470 Topic “ Debt" a portion of the proceeds were allocated to the warrants based on their relative fair value, which totaled $2,444,729 using the Black Scholes option pricing model. Further, the Company attributed a beneficial conversion feature of $1,455,271 to the Series A preferred shares based upon the difference between the effective conversion price of those shares and the closing price of the Company’s common stock on the date of issuance. The assumptions used in the Black-Scholes model are as follows:  (1) dividend yield of 0%; (2) expected volatility of 74%, (3) weighted average risk-free interest rate of 2.2%, (4) expected life of 5 years, and (5) estimated fair value of  Company's  common stock of $4.25 per share. The expected term of the warrants represents the estimated period of time until exercise and is based on historical experience of similar awards and giving consideration to the contractual terms. The amounts attributable to the warrants and beneficial conversion feature, aggregating $3,900,000 have been recorded as a discount and deducted from the face value of the preferred stock. Since the preferred stock is classified as temporary equity, the discount will be amortized over the period from issuance to February 2015 (the initial redemption date) as a charge to additional paid-in capital (since there is a deficit in retained earnings).
 
Effective June 30, 2010 and applied retroactively herein for the period ended March 31, 2010, the holders of  the outstanding shares of Series A Preferred Stock and of the outstanding warrants to purchase shares of common stock (collectively, the “Warrants”) issued pursuant to the Purchase Agreement, agreed to amend the terms of the Series A Preferred Stock and Warrants in the following manner:
 
·
The parties agreed to add a provision to the certificate of designation for the Series A Preferred Stock whereby the minimum price in which the conversion price of the Series A Preferred Stock may be reduced shall be equal to $1.00;
 
·
The parties agreed to add a provision to the Warrants whereby the minimum price in which the exercise price of the Warrants may be reduced shall be equal to $1.00;
 
·
The parties agreed to add a provision to the Purchase Agreement whereby until the 36 month anniversary of the date of the Purchase Agreement, the Company shall not issue any of its equity securities below $1.00 without the prior written consent of any holder who was issued a Warrant for an aggregate of 2% or more of the Warrants initially issued pursuant to the Purchase Agreement.

The charge to additional paid in capital for amortization of discount and costs for the period ended March 31, 2010 was $65,000.  There was no amortization of discounts for Series A preferred stock for the period ended December 31, 2009.

For the period ended December 31, 2010 we have accrued dividends of $18,958. The accrued dividends have been charged to additional paid-in capital (since there is a deficit in retained earnings) and the net unpaid accrued dividends been added to the carrying value of the preferred stock. There were no accrued dividends for Series A preferred stock for the period ended March 31, 2009.

8.                 COMMITMENTS

Effective March 1, 2007, the Company has entered into an operating lease agreement for its corporate office.  The Company was released from its lease at its prior location on November 2, 2006 due to the Company relocating to a new facility owned by the same landlord.  The Company relocated to the new facility in February 2007.  The current lease term expiration date is January 31, 2012.

Future minimum payments required under operating leases are as follows:

Year Ending December 31:
     
       
2010
   
175,322
 
2011
   
178,826
 
2012 and thereafter
   
29,902
 
   
$
384,050
 

Rent expense plus common area maintenance and related facilities fees for the three months ended March 31, 2010 and the three months ended March 31, 2009 totaled $53,519 and $46,942, respectively.

 



 
18

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010




Effective August 15, 2005, the Company guaranteed payments on an operating lease agreement for retail space for the benefit of its affiliate Planet Replay LLC.  The operation has been discontinued.  The lease requires monthly payments of $6,170 plus Common Area Maintenance and taxes with annual increases of 2.5% and the term is for 10 years. The location has been vacated as a result of the discontinued operations (see discontinued operations footnote). The 2010 amount of the future payments are included in the liabilities of the discontinued operations.
 
Future minimum payments required under operating leases are as follows:

Year Ending December 31:
     
       
2010
   
82,413
 
2011
   
84,476
 
2012
   
84,476
 
2013
   
84,476
 
2014 and thereafter
   
159,012
 
   
$
494,853
 

Rent expense for the three months ended March 31, 2010 and 2009 totaled $25,073 and $33,156, respectively.

9.                 RELATED PARTY TRANSACTIONS

On December 6, 2007 the Company issued a note payable of $500,000 to TW Development LLC, a company owned by Todd Hays, our Chief Executive officer. The note bears interest at 6% and matured on April 4, 2008, at which point it was extended to December 31, 2009. The note requires no monthly payments. The borrower may repay this note at any time, in whole or in part, without penalty or additional interest. During the first quarter of 2010, additional funds were advanced by the related party and the note was extended to December 31, 2010. The balance as of March 31, 2010 was $725,286.

On February 25, 2010, Mr. Hays  participated in the February 2010 private placement purchasing 50,000 shares of Series A Preferred stock (convertible into 50,000 shares of our common stock) and warrants to purchase 50,000 shares of our common stock, for an aggregate purchase price of $100,000.

In 2010 and 2009, the Company entered into certain agreements with DK Trading pursuant to which DK Trading engaged the Company to procure, purchase and sell pre-owned video games and associated packaging materials, together with such other merchandise as designated by DK Trading, on behalf of DK Trading. See Note 5 Product Financing Agreement. DK Trading is controlled by its managers, who include, among others, Gregg Smith, a shareholder of the Company.

In 2009, DK Trading earned a referral fee commission from the Company for 50% of the net profit earned on a one-time transaction in the amount of $285,967. The fee was paid in 2010.

10. 
CAPITAL STOCK
 
The Company has authorized 20,000,000 shares of preferred stock, with a par value of $.0001 per share. As of March 31, 2010, the Company has designated 3,000,000 shares of preferred stock as Series A preferred stock, of which 2,837,500 shares of preferred stock are issued and outstanding,. There were no shares of preferred stock outstanding as of December 31, 2009. The company has authorized 100,000,000 shares of common stock, with a par value of $.0001 per share. As of December 31, 2010 and December 31, 2009, the Company has 8,290,000 and 7,090,000, respectively, of shares of common stock issued and outstanding.

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”).   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.

 
19

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010


 

11. 
STOCK OPTIONS & WARRANTS
 
Employee Stock Options

The following table summarizes the changes in the options outstanding at March 31, 2010, and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.

Range of
Exercise
Prices
   
Number
Outstanding
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
   
Number
Exercisable
   
Weighted
Average
Exercise
Price
 
                                 
$
2.25
     
1,000,000
   
$
2.25
     
4.91
     
-
   
$
2.25
 
 
2.50
     
50,000
     
2.50
     
4.94
     
16,666
     
2.50
 
 
4.60
     
100,000
     
4.60
     
4.94
     
33,334
     
4.60
 
                                             
         
1,150,000
             
4.91
     
50,000
         

A summary of the Company’s stock awards for options as of December 31, 2009 and changes for the three months ended March 31, 2010 is presented below:

   
Options 
and Warrants
   
Weighted
Average
Exercise
Price
 
Outstanding, December 31, 2009
   
   
$
 
Granted
   
1,150,000
     
2.47
 
Exercised
   
     
 
Expired/Cancelled
   
     
 
Outstanding, March 31, 2010
   
1,150,000
     
2.47
 
Exercisable, March 31, 2010
   
50,000
     
3.90
 

 
 
 

 
20

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010

 
 
The weighted-average fair value of stock options granted to employees during the three-month period ended March 31, 2010 and 2009 and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes-Merton (“Black-Scholes”) option pricing model are as follows:

   
March 31, 2010
   
March 31, 2009
 
Significant assumptions (weighted-average):
           
Risk-free interest rate at grant date
   
3.5
 %
   
-   
 
Expected stock price volatility
   
74
 %
   
-   
 
Expected dividend payout
   
-    
     
-    
 
Expected option life (in years)
   
5.0 
     
-   
 
Expected forfeiture rate
   
0
 %
   
-   
 
Fair value per share of options granted
 
$
3.39
   
$
-   
 

The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award.
 
We estimate the volatility of our common stock based on the calculated historical volatility of similar entities in industry, in size and in financial leverage whose shares prices are publicly available. The Company based the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company has not paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero in the Black-Scholes option valuation model.

Total stock-based compensation expense in connection with options granted to employees recognized in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2010 was $286,032, and for the three ended March 31, 2009 was $0, respectively, net of tax effect. Additionally, the aggregate intrinsic value of options outstanding and unvested as of March 31, 2010 is $0.

Warrants

The following table summarizes the changes in the warrants outstanding at March 31, 2010, and the related prices for the shares of the Company’s common stock issued to non-employees of the Company.  These warrants were issued in lieu of cash compensation for services performed or financing expenses and in connection with the Series A preferred private placement.

Range of
Exercise
Prices
   
Number
Outstanding
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
   
Number
Exercisable
   
Weighted
Average
Exercise
Price
 
                                 
$
0.65
     
1,120,000
   
$
.65
     
3.81
     
1,120,000
   
$
.65
 
 
2.50
     
2,040,000
     
2.50
     
4.91
     
2,020,000
     
2.50
 
                                             
         
3,160,000
             
4.52
     
3,160,000
         
 
 

 
21

 
 
GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010


 
 
A summary of the Company’s stock awards for warrants as of December 31, 2009 and changes for the three months ended March 31, 2010 is presented below:

   
Options 
and Warrants
   
Weighted
Average
Exercise
Price
 
Outstanding, December 31, 2009
   
1,110,000
   
$
0.65
 
Granted
   
2,350,000
     
2.50
 
Exercised
   
     
 
Expired/Cancelled
   
(300,000
)
   
0.65
 
Outstanding, March 31, 2010
   
3,160,000
     
1.84
 
Exercisable, March 31, 2010
   
3,160,000
     
1.84
 

The Company issued 1,950,000 warrants to Series A preferred stockholders and 400,000 compensatory warrants to non-employees during the three months ended March 31, 2010.  The Series A Warrants entitled the holder to purchase one share of the Company’s common stock per warrant, have a term of five years from the date of issuance with 100% coverage and an exercise price of $2.50.  The warrants shall become exercisable on a cashless exercise basis if the underlying shares have not been fully registered within twelve months of the closing of the February 2010 private placement transaction.  Under ACS 718 "Compensation - Stock Compensation"  (formerly FASB Statement 123R), the Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants, respectively; dividend yield of zero percent for all periods; expected volatility is 74%; risk-free interest rate .41%; expected lives ranging from three years to five years.

Total non-employee stock-based compensation expense in connection with warrants recognized in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2010 was $1,579,690 and none for the three months ended June 30, 2009, respectively, net of tax effect.


12.              MAJOR CUSTOMERS

Two major customers accounted for a combined $10,008,518 and $6,460,733 of revenue for the three months ended March 31, 2010 and 2009, respectively.  These amounts represent 87% and 77% of the Company’s revenue for the three months ended March 31, 2010 and 2009, respectively.

As of March 31, 2010 and 2009, these customers accounted for 98% and 77% of accounts receivable, respectively.


 
 
22

 

GAME TRADING TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements (Unaudited)
March 31, 2010



13.              SUBSEQUENT EVENTS

The Company evaluated for subsequent events through the issuance date of the Company’s financial statements and the following items are noted.

On April 20, 2010, certain holders of Unit Purchase Options exercised Unit Purchase Options to purchase 825,000 Units resulting in aggregate gross proceeds to us of $1,650,000.

On April 22, 2010, in connection with his appointment as a director, Eric Salzman received an option to purchase 60,000 shares of our common stock at a price of $4.75 per share, the closing price of our common stock as quoted on the Over-the-Counter Bulletin Board on April 21, 2010.

On April 26, 2010, certain holders of Unit Purchase Options exercised Unit Purchase Options to 62,500 units of our securities resulting in aggregate gross proceeds to us of $125,000.

Bank of America Revolver

On May 4, 2010, Gamers Factory, Inc. (the “Borrower”), a wholly owned subsidiary of Game Trading Technologies, Inc. (the “Company”) entered into a Loan Agreement (the “Loan Agreement”) with Bank of America, N.A.   The Loan Agreement provides for a revolving line of credit to the Borrower equal to the lesser of (i) $2,500,000 (the “Credit Limit”) or the sum of (a) 75% of the balance due on Acceptable Receivables (as defined in the Loan Agreement) and (b) the lesser of $1,000,000 or 20% of the value of Acceptable Inventory (as defined in the Loan Agreement) (the “Facility No. 1 Commitment”).  The Borrower has the right to prepay loans under the Loan Agreement in whole or in part at any time. All amounts borrowed under the Loan Agreement must be repaid on or before May 27, 2011.  Loans under the Loan Agreement bear interest at a rate equal to the British Bankers Association London interbank offered rate (“BBA LIBOR”) plus 2.50% per annum.

Initial borrowings under the Loan Agreement are subject to, among other things, the substantially concurrent repayment by the Borrower of all amounts due and owing under the Borrower’s existing second amended and restated loan agreement and $1,800,000 second amended and restated promissory note, each dated December 29, 2009, respectively, with The Columbia Bank and the satisfaction and termination of such borrowing (collectively, the “Columbia Bank Loan”).  All amounts owed under the Columbia Bank Loan were satisfied and terminated by Borrower on May 6, 2010.
 
As of the date of this filing the balance on the revolver was $1,863,285, with additional availability of $636,715.




 
23

 
 

 
Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
 
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words.  Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
 
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company should be read in conjunction with the Consolidated Financial Statements and notes related thereto included in this Quarterly Report on Form 10-Q. Important  factors  currently  known  to Management  could  cause  actual  results  to differ  materially  from  those in forward-looking  statements.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations.  No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.  Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.
 
RESTATEMENT OF PREVIOUSLY-ISSUED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
As previously described in the “Explanation of our Restatement” preface to this Second Amendment, we have restated our condensed consolidated financial statements for the quarterly period ended March 31, 2010 and 2009, to correct errors related to the allocation of cost of sales, to correct errors and reporting for the related party product financing costs and correct an overstatement of share-based compensation expense and revaluation of stock option methodology for the period ended March 31, 2010.  The following Management’s Discussion and Analysis of Financial Condition and Results of Operations has been updated to reflect the restatements and which is more fully described in Note 2 to our condensed consolidated financial statements.  Except as amended to reflect the restatements previously described, the information in this Item 2 has not been updated and continues to speak as of the date of the Original Filing and the First Amendment.


Overview
 
On February 25, 2010, we completed a “reverse acquisition” transaction, in which we entered into the Exchange Agreement with Gamers Factory, Inc. (“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”). 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.  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. (“GTTI”) and our trading symbol to “GMTD.OB.”
 
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.
 
Game Trading Technologies, Inc. is a leading provider of comprehensive trading solutions and services for video game retailers, publishers, rental companies, and consumers.  Through our trading platform, we provide our customers with extensive services including valuation, procurement, refurbishment, and merchandising of pre-owned video games.  Additionally, through our trading platform, we process and market video game consoles, DVDs, and video game accessories, and provide related e-commerce retailing and interactive marketing services.
 


 
24

 



Results of Operations - Three months ended March 31, 2010 compared to the Three months ended March 31, 2009

The table below outlines revenues and related cost of sales for comparable periods:

 
Three months ended March 31,
 
 
2010
 
2009
 
Variance
 
                               
Revenue
 
$
11,525,287
     
100
%
 
$
8,341,060
     
100
%
 
$
3,184,227
     
38
%
Cost of Sales
   
9,921,353
     
86
%
   
6,899,492
     
83
%
   
3,021,861
     
44
%
Gross Profit
 
$
1,603,934
     
14
%
 
$
1,441,568
     
17
%
 
$
162,366
     
11
%
 
Net revenues increased by $3,184,227, or 38%, compared to the three months ended March 31, 2009.    The increase was due primarily to an increase in bulk sales along with the launch of a major new retailer program, “Great Games Under $20.”  We also had greater access to supply in the market as a result of increased working capital from our February 25, 2010 capital raise.  The gross profit percentage of 14% decreased by 3% compared to 17% in the prior year period.

Operating Expense. Operating expenses, which consist of sales and marketing expenses, general and administrative costs, financing and merger transaction costs, stock based compensation and depreciation. The operating expenses for the three months ended March 31, 2010 increased by $2,588,085, or 407%, to $3,224,490 from $636,405 during the three months ended March 31, 2009. The major component of these increased expenses between the corresponding periods was an increase in selling, general and administrative costs of $288,953 and an increase in financing and merger transaction costs of $425,617 as well as non-cash employee stock based compensation of $286,032 and non-employee stock based compensation of $1,579,689 for the three months ended March 31, 2010, respectively.

Selling, General and Administrative Expenses (SG&A). The SG&A expenses consist of salaries, advertising, professional service fees, investor relations services and overhead expenses, totaled $1,334,705 during the three months ended March 31, 2010 as compared to $620,135 during the three months ended March 31, 2009 resulting in an increase of $714,570, or 115%. Financing & merger transaction costs amounted to approximately $426,000 of the increase as the Company merged into a public entity and correspondingly raised gross proceeds of $3.9 million through the February 2010 private placement. Outbound shipping expense increased by $114,067, or 87%, to $245,751 for the three months ended March 31, 2010. The increase in shipping expense as a percentage of revenues is due to significantly increased volume of small package shipments, which are higher in cost per unit as compared to LTL and truckload shipments.

 
 
25

 

 

Stock Based Compensation . During the three months ended March 31, 2010, the employee stock based compensation expense was $286,032 from issuances of employee incentive stock options. The incentive stock options were valued using the Black Scholes method and the option shall become exercisable during the term of recipient’s employment in three equal annual installments. There were no stock option issuances in the prior year period.

Non-Employee Stock Based Compensation . For the three ended March 31, 2010, $1,579,689 noncash charges were due to the issuance of stock warrants in exchange for professional services associated with reverse merger and private placement consummated in February 2010.  The value of the warrants was determined using the Black Scholes method, the details of which are more fully explained within the notes to the financial statements.  There were no warrant issuances in the prior year period.

Net Income (Loss). We had a net loss of ($1,638,997) for the three months ended March 31, 2010 as compared to a net income of $628,134 for the three months ended June 30, 2009. The increase in legal and accounting services, the charges resulting from the warrants and stock options issuances related to the private placement are the primary reason for the net loss for the period.

Seasonality
 
Our business is seasonal since we rely 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 trade-ins and returns, there exists significant supply of these items immediately following the holiday season in January through March. Historically, our sales lag the holiday season by one quarter. We have historically generated our highest sales and operating profits during the first quarter of the year.
 
Liquidity and Capital Resources
 
We have financed our operations since inception primarily through private and public offerings of our equity securities and the issuance of various debt instruments and asset based lending.


Working Capital

Our working capital increased by $3,289,265 during the three months ended March 31, 2010 from a working capital surplus of $597,887 at December 31, 2009 to a working capital surplus of $3,887,152 at March 31, 2010. The change in working capital for the three months ended March 31, 2010 is due to a combination of factors, of which significantly include:
     
   
Cash had a net decrease from working capital by $340,513 for the three months ended June 30, 2010. The most significant uses and proceeds of cash were:
     
   
·   Approximately $4,293,000 of cash consumed directly in operating activities
   
·   Purchases of equipment of $49,953
·   An increase in net Product Financing - related party advances of $1,091,741
   
·   Proceeds from the Series A Preferred offering of $3,900,000
   
·   Net proceeds from a related party note payable of $316,862
   
·   Repayments of certain notes payable outstanding of $1,306,656
  
Of the total current assets of $9,884,824 as of March 31, 2010, cash represented $300,575.  Of the total current assets of $5,922,208 as of December 31, 2009, cash represented $641,088.

Series A Preferred Offering

We completed the closing of a private placement of $3,900,000 of units (each, a “Unit” and collectively, the “Units”) pursuant to the terms of a Securities Purchase Agreement, dated as of February 25, 2010, with each Unit consisting of one share of our series A convertible preferred stock and a warrant to purchase one share of our common stock.  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 our 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 the series A convertible preferred stock) at an exercise price of $2.50 per share through February 25, 2015.
 
 

 
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Proceeds from the issuance of common stock

During the three months ended March 31, 2010 , the Company did not receive any proceeds from the issuance of its common stock.

Cashflow analysis

Cash used in operations was $4,292,508 during the period ending March 31, 2010 and proceeds provided by operations was $583,943 during the period ended March 31, 2009. During the period ended March 31, 2010, our primary capital needs were for working capital necessary to fund inventory purchases and reducing our trade payables.

We utilized cash for investing activities of $49,953 and $0 during the periods ended March 31, 2010, and 2009, respectively. This increase is primarily attributable to the acquisition of additional computer and warehouse equipment.

Cash provided from financing activities of $4,001,948 during the period ending March 31, 2010, compared to cash used in financing activities was $247,358 during the period ending March 31, 2009. This increase is primarily attributable to funds received from the February 2010 Series A preferred private placements of $3,900,000, note payable advances from a related party of $316,862 and proceeds from Product Financing - related parties for inventory purchases of $1,091,742. The financing activities also included repayments of certain notes payable of $1,306,656 and $247,358 during the period ending March 31, 2010 and 2009, respectively.
 
We believe that we will require additional financing to carry out our intended objectives during the next twelve months. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. We currently have no firm commitments for any additional capital.
 
The downturn in the United States stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities , stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing.   If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
 

Off-Balance Sheet Arrangements
 
As of March 31, 2010, we had no off-balance sheet arrangements.
 
Item 3.        Quantitative and Qualitative Disclosures About Market Risk
 
None.
 
Item 4T.      Controls and Procedures

 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Exchange Rule 13a-15(e)) as of March 31, 2010. Management recognizes that any disclosure controls and procedures no matter how well designed and operated, can only provide reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management has reassessed the effectiveness of our disclosure controls and procedures and based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective  as of March 31, 2010 because of the items set forth below:
 
·  
 The Company did not have sufficient oversight to ensure financial reporting,  proper disclosures around related-party transactions or dissemination of the Company’s policies and procedures.

·  
 The Company did not maintain effective controls over the period-end financial reporting process, including controls and supporting documentation with respect to journal entries, account reconciliations and proper segregation of duties.

·  
The Company did not implement proper segregation of duties. In certain instances, persons responsible to review transactions for validity, completeness and accuracy were also responsible for preparation.

·  
The Company’s stock option vesting determination was inaccurately established in February 2010 and warrant and stock option methodology was inconsistent with guidance.
 
 
 
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·  
The Company did not maintain effective controls within the inventory function, including purchasing, receiving, returns, physical inventory and obsolescence analysis.

·  
 The Company did not develop and maintain effective general computer controls, including use of a financial application and inventory management system that lack sufficient internal controls, ensuring proper security access within the financial and inventory management applications, ensuring proper change management procedures were followed, and ensuring adequate information technology procedures were followed in accordance with generally accepted best practices.

·  
The Company failed to maintain effective controls within the revenue function, including monitoring major sales contracts to ensure revenue recognition criteria were identified and properly monitored to ensure revenue was recognized, inventory was relieved, and accounts receivable and cost of goods sold were recorded in the correct period.

MANAGEMENT’S REMEDIATION PLAN

Based on the control deficiencies identified above, we have designed and plan to implement, or in some cases have already implemented, the specific remediation initiatives described below:

·  
Prior to filing this Second Amendment, we designed and are implementing robust corporate governance including: (1) direct oversight of our internal controls by the Audit Committee of our Board of Directors; (2) detailed review of our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q by the Audit Committee of our Board of Directors; (3) adoption and communication of our Code of Business Conduct and Ethics; (4) adoption and communication of our Policy on Insider Trading; (5) revision of policies within our employee handbook to ensure that appropriate disciplinary actions may be taken in the event an employee fails to properly perform their responsible internal controls or intentionally overrides any internal control and completion of employee training on the policy revisions; (6) adoption of charters for our Audit, Compensation, Governance and Nominating Committees of our Board of Directors; (7) adoption of our Whistleblower Policy, which includes our anonymous reporting system; and (8) adoption of our policy on reporting and investigating complaints regarding accounting, internal accounting controls or auditing matters and concerns regarding questionable accounting or auditing matters.

·  
In September 2010, we hired a Chief Financial Officer with considerable public company reporting experience who is evaluating the depth and breadth of knowledge of US GAAP and external reporting requirements among the current members of the accounting staff. We are committed to establishing procedures and utilizing experienced individuals with professional supervision to properly segregate duties, prepare and approve the consolidated financial statements and footnote disclosures in accordance with US GAAP.

·  
 Prior to filing this Second Amendment, we improved our financial reporting and inventory and revenue procedures in financial reporting and in inventory and in revenue cycles and continue to implement fundamental controls aligned with our business strategy. There is a specific focus on customer contracts, revenue recognition and enhancing 3rd party shipper reporting requirements.

·  
Prior to filing this Second Amendment, we enhanced our stock option and warrant valuation procedures to incorporate a comparative analysis of firms similar to ours that have significant stock trading history.

·  
The Board of Directors is more actively involved in providing additional oversight of the Company’s internal controls, formal review of our financial statements, and more detailed review of the draft periodic reports we anticipate filing with the SEC.

·  
We have initiated efforts to ensure our employees understand the importance of internal controls and compliance with corporate policies and procedures. We will implement a reporting and certification process for management involved in the performance of internal controls and preparation of the Company’s financial statements.

·  
We will design and implement a formalized financial reporting process that includes balance sheet reconciliations, properly prepared, supported and reviewed journal entries, properly segregated duties, and properly completed and approved close checklist and calendar.

·  
We will initiate a formal feasibility assessment for implementing a compliant ERP system to replace our current financial software application and inventory management system during our current fiscal year. As part of this assessment, we will thoroughly review the roles and responsibilities of our staff involved in the performance of our financial close process and other internal controls to ensure duties are properly segregated, access rights within our new financial software application comply with designated roles and responsibilities and support the proper segregation of duties.

·  
The Company may retain third party specialists to assist us in the design, implementation and testing of our internal controls as necessary.

As noted above and subsequent to the fiscal quarter covered by this report, but prior to the filing of this Second Amendment, several remedial measures were identified and implemented in response to the conclusion reached by our Chief Executive Officer and Chief Financial Officer that, as of December 31, 2010, our disclosure controls and procedures were not effective.  

Changes in Internal Control over Financial Reporting
 
There were no changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that materially affected, or were reasonably likely to materially affect such controls.

 
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PART II - OTHER INFORMATION
 
Item 1.        Legal Proceedings
 
We are not party to any legal proceedings, nor are we aware of any contemplated or pending legal proceedings against us.
    
Item 1A.     Risk Factors
 
Not applicable.
 
Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
 
On April 26, 2010, the holders of certain unit purchase options (the “Options”) issued by the Company in connection with that certain securities purchase agreement, dated February 25, 2010 (the “Purchase Agreement”), exercised Options to purchase 62,500 units of the Company’s securities for aggregate gross proceeds of $125,000.  Each unit (“Unit”) consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 26, 2015.
 
On April 22, 2010, in connection with his appointment as a director, Eric Salzman received an option to purchase 60,000 shares of our common stock at a price of $4.75 per share, the closing price of our common stock as quoted on the Over-the-Counter Bulletin Board on April 21, 2010.  The options vest in three (3) equal installments of thirty-three and one-third percent (33 1/3%), the first installment to be exercisable on the date of grant, with an additional thirty-three and one-third percent (33 1/3%) becoming exercisable on each of April 22, 2011 and April 22, 2012, respectively.  These options were issued under the Company’s Amended and Restated 2009 Incentive Stock Plan.
 
On April 20, 2010, the holders of certain Options issued by the Company in connection with the Purchase Agreement, exercised Options to purchase 825,000 units of the Company’s securities for aggregate gross proceeds of $1,650,000.  Each Unit consisted of one share of the Company’s series A convertible preferred stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $2.50 per share through April 20, 2015.
 
On March 9, 2010, in connection with his appointment as a director, Jack Koegel received an option to purchase 50,000 shares of the Company’s common stock at an exercise price of $2.50 per share and an option to purchase 100,000 shares of the Company’s common stock at an exercise price of $4.60 per share.  The options vest in three (3) equal installments of thirty-three and one-third percent (33 1/3%), the first installment to be exercisable on the date of grant, with an additional thirty-three and one-third percent (33 1/3%) becoming exercisable on each of March 9, 2011 and March 9, 2012, respectively.  These options were issued under the Company’s Amended and Restated 2009 Incentive Stock Plan.
 
On February 25, 2010, we completed a “reverse acquisition” transaction (the “Transaction”), in which we entered into the Exchange Agreement with Gamers Factory, Inc. and for certain limited purposes, its stockholders. Pursuant to the Exchange Agreement, the stockholders 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, and all of the outstanding warrants of Gamers were exchanged for warrants to purchase 1,160,000 shares of our common stock.
 
In connection with the closing of the Exchange Agreement, we completed the closing of a private placement (referred to herein as the “February 2010 private placement”) of $3,900,000 of units (each, a “Unit” and collectively, the “Units”) to purchasers that qualified as “accredited investors”, as defined in Regulation D promulgated under the Securities Act of 1933, as amended, pursuant to the terms of a Securities Purchase Agreement, dated as of February 25, 2010, with each Unit consisting of one share of our series A convertible preferred stock and a warrant to purchase one share of our common stock.  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 our 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 the series A convertible preferred stock) at an exercise price of $2.50 per share through February 25, 2015.



 
29

 
 
 At the closing of the February 2010 private placement, buyers that purchased shares of our series A convertible preferred stock with a stated value of at least $150,000 received a unit purchase option (the “Unit Purchase Option”) to purchase, on the same terms as those Units sold at the closing of the February 2010 private placement, additional Units of series A convertible preferred stock and warrants equal to 50% of the Units they purchased at the closing of the February 2010 private placement.  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 of the February 2010 private placement, any unexercised portion of such Unit Purchase Option will be offered and may be purchased (no later than the 60th day following the closing of the February 2010 private placement) by each other holder of a Unit Purchase Option that elects to exercise its Unit Purchase Option in full. The shares of common stock underlying the securities issuable upon exercise of a Unit Purchase Option are entitled to the same registration rights as those securities underlying the Units issued at the closing of the February 2010 private placement.
 
Approximately $702,000 of the net proceeds of the February 2010 private placement was used by us to repay outstanding indebtedness on behalf of Gamers, 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.
 
·  
$250,000 to Vision Opportunity Master Fund, Ltd., to prepay in full Gamers’ senior secured promissory note, dated December 23, 2009, which bore interest at 8% per annum and would have matured on June 30, 2010.
 
Approximately $2,850,000 of the net proceeds of the February 2010 private placement will be used for working capital and general corporate purposes, including amounts required to pay officers’ salaries, ongoing public reporting costs, investor relations, insurance, office-related expenses (including equipment and supplies), and other corporate expenses.

Unless otherwise noted in this section, with respect to the sale of unregistered securities referenced above, all transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and Regulation D promulgated thereunder.
 
Item 3.       Defaults Upon Senior Securities
 
                   None.
 
Item 4.       Removed and Reserved    
  

Item 5.       Other Information
 
                   None.
 
Item 6.        Exhibits
 
                   Exhibits required by Item 601 of Regulation S-K:
 
Number
 
Description
     
31.1
 
Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
31.2
 
 Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer
32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.




 
30

 
 


 
SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
GAME TRADING TECHNOLOGIES, INC
     
     
Date:    April 20, 2011
By:
/s/  Todd Hays                                                                       
   
Todd Hays
   
Chief Executive Officer, President and Director
(principal executive officer)
     
 


 
31

 
 
Game Trading Technologies, Inc.
Index to Exhibits

 
 
Number
 
Description
     
31.1
 
Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
31.2
 
Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer
32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.


 

 

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