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EX-31.2 - EXHIBIT 31.2 - CITY LANGUAGE EXCHANGE INCex312.htm
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EX-32.1 - EXHIBIT 32.1 - CITY LANGUAGE EXCHANGE INCex321.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q/A
(Amendment No. 1)

(Mark One)   
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 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)
 
 
 
 
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 August 16, 2010, there were 8,290,000 shares of the registrant’s common stock outstanding.

 
 
 
1

 
 
Game Trading Technologies, Inc.
 
TABLE OF CONTENTS

 
Page
   
PART I - FINANCIAL INFORMATION
 
   
                   Explanation of Restatements 3
   
Item 1.       Financial Statements (Unaudited)
4
   
Condensed Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009
4
   
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
5
   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (unaudited)
6
   
Notes to Condensed Consolidated Financial Statements (unaudited).
7
   
Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
   
Item 3.       Quantitative and Qualitative Analysis About Market Risk
30
 
  
Item 4.     Controls and Procedures
30
   
PART II - OTHER INFORMATION
 
   
Item 1.        Legal Proceedings
31
   
Item 1A.     Risk Factors
31
   
Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
31
   
Item 3.        Defaults Upon Senior Securities
31
   
Item 4.        Removed and Reserved
31
   
Item 5.        Other Information
31
   
Item 6.        Exhibits
31
   
SIGNATURES
32
  
 
 
 
2

 

EXPLANATION OF OUR RESTATEMENT
 
Game Trading Technologies, Inc. (hereinafter referred to as “us,” “we,” or the “Company”) is filing this Amendment No. 1 on Form 10-QSB/A (the “First Amendment”) to its Quarterly Report for the quarterly period ended June 30, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on August 23, 2010 (the “Original Report”) 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 in 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 three and six months ended June 30, 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.
 
 
·
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 three months ended June 30,  2010 Statement of Operations was incorrectly recorded and subsequently restated to revenue for the three months ended March 31, 2010. The Company will decrease revenue and accounts receivable by approximately $124,000 and decrease the corresponding cost of sales and decrease inventory by approximately $71,000 for the three months ended June 30, 2010. 
 
 
·
The Company determined it had not properly calculated the costs of sales utilizing the average costs method for three and six months ended June 30, 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 inventory in the amount of approximately $329,000  for the three months ended June 30, 2010 and increasing the cost of sales and inventory in the amount of approximately $92,000 for the six months ended June 30, 2010  .
 
 
This First Amendment reflects the restatement of our previously issued consolidated financial statements contained in the Original Report for the three and six months ended June 30, 2010.  These adjustments are fully discussed in Note 2 to the condensed consolidated financial statements contained in this First Amendment.  
 
This First Amendment speaks only of the original filing date of the Original Report and, except for those Items disclosed in this explanatory note, is unchanged from the Original Report. This First Amendment reflects material subsequent events which occurred after the filing of the Original Report. You should read this First Amendment together with our other reports that update and supersede the information contained in this First Amendment .

 
 
3

 
 
PART I   FINANCIAL INFORMATION
 
Item 1.    Financial Statements

Game Trading Technologies, Inc.
Condensed Consolidated Balance Sheets
 
   
(As Restated) See Note 2
(Unaudited)
   
*(Audited)
 
   
June 30,
2010
   
December 31,
2009
 
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
 
$
158,961
   
$
641,088
 
Accounts Receivable - Net of Allowance of $100,000 as of June 30, 2010 and December 31, 2009
   
2,590,033
     
2,383,688
 
Inventories
   
5,250,208
     
2,897,432
 
Prepaid Expenses and Other
   
690,971
     
-
 
TOTAL CURRENT ASSETS
   
8,690,173
     
5,922,208
 
                 
Property and Equipment, net
   
343,300
     
109,984
 
                 
Other Assets
               
Deferred Financing Costs
   
-
     
258,325
 
TOTAL OTHER ASSETS
   
-
     
258,325
 
                 
TOTAL ASSETS
 
$
9,033,473
   
$
6,290,517
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities
               
Accounts payable
 
$
2,738,358
   
$
3,967,429
 
Accounts payable - related party     -       285,967  
Accrued expenses and other
   
69,007
     
60,534
 
Revolving Line of Credit
   
2,063,285
     
-
 
Note Payable - current portion
   
-
     
513,046
 
Note payable - related party
   
18,402
     
408,424
 
Discontinued Operations – liability
   
21,735
     
88,921
 
TOTAL CURRENT LIABILITES
   
4,910,787
     
5,324,321
 
                 
Long Term Liabilities
               
Note Payable – non-current portion
   
-
     
2,236,954
 
Warrant Redemption Liability
   
-
     
281,935
 
                 
                 
TOTAL LONG TERM LIABILITES
   
-
     
2,518,889
 
                 
TOTAL LIABILITIES
   
4,910,787
     
7,843,210
 
                 
                 
Redeemable preferred stock, Series A; $.0001 par value, 2,837,500 shares authorized, 2,837,500 and 0 shares issued and outstanding at June, 30, 2010 and December 31, 2009, respectively, net (Face value $5,675,000 and $0, respectively)
   
385,173
     
 
                 
Stockholders' equity
               
                 
Preferred stock, $0.0001 par value, 17,162,500 shares authorized, none issued and outstanding as of June 30, 2010 and December, 31, 2009, respectively
   
-
     
-
 
Common stock, $0.0001 par value, 100,000,000 shares authorized, 8,290,000 and 7,090,000 shares issued and  outstanding at June 30, 2010 and December 31, 2009, respectively
   
829
     
709
 
Additional paid-in capital
   
7,659,792
     
89,659
 
Accumulated deficit
    (3,923,108
)
   
(1,643,061
)
Total stockholders' equity
   
3,737,513
     
(1,552,693
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
9,033,473
   
$
6,290,517
 
* Derived from audited financial statements
The accompanying notes are integral parts of these financial statements.

 
 
4

 
 

Game Trading Technologies, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
   
For The Three Months Ended
June 30,
   
For The Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(As Restated) See Note 2
         
(As Restated) See Note 2
       
Net Sales
 
$
6,507,951
   
$
12,998,799
   
$
18,033,238
   
$
21,339,859
 
Cost of Sales
   
5,452,880
     
11,168,226
     
15,374,233
     
18,067,719
 
Gross Profit
   
1,055,071
     
1,830,573
     
2,659,005
     
3,272,140
 
                                 
Operating Expenses:
                               
Selling, General and Administrative
   
1,278,620
     
649,928
     
2,613,323
     
1,270,062
 
Employee Stock Based Compensation
   
387,933
     
-
     
673,966
     
-
 
Non-Employee Stock Based Compensation
   
-
     
-
     
1,579,689
     
-
 
Depreciation
   
11,235
     
17,123
     
35,299
     
33,393
 
Total Operating Expense
   
1,677,788
     
667,051
     
4,902,277
     
1,303,455
 
                                 
Income (Loss) from Operations
   
(622,717
)
   
1,163,522
     
(2,243,272
)
   
1,968,685
 
                                 
Other Income (Expenses):
                               
Interest Expense, net
   
(18,333
)
   
(212,005
)
   
(83,268)
     
(355,878
)
                                 
Other
   
-
     
-
     
46,493
     
-
 
Total Other Income (Expenses)
   
(18,333
   
(212,005
)
   
(36,775
   
(355,878)
 
                                 
Income (Loss) Before Provision for Income Taxes
   
(641,050
   
951,517
     
(2,280,047
   
1,612,807
 
                                 
Provision for Income Taxes
   
-
     
-
     
-
     
-
 
                                 
Income (Loss) from Continuing Operations
 
$
(641,050
 
$
951,517
   
$
(2,280,047
 
$
1,612,807
 
                                 
Discontinued Operations
                               
Loss from Discontinued Operations
   
-
     
35,653
     
-
     
68,809
 
Net income (loss) attributable to common shareholders before accretion of preferred dividends and discount
 
$
(641,050
)  
 
$
915,864
   
$
(2,280,047
 
$
1,543,998
 
                                 
Accretion of preferred dividends and discount
   
66,007 
      -      
  84,965
     
  -
 
Accretion of preferred amortization of beneficial conversion and warrant features
   
 254,166
      -      
319,166 
      -  
Net income (loss) attributable to common shareholders
 
$
(961,223
)  
 
$
915,864
   
$
(2,684,178
 
$
1,543,998
 
                                 
Net income (loss) per share:
                               
Income (loss) per share from continuing operations – basic & diluted
 
$
(0.08
 
$
0.13
   
$
(0.34
 
$
0.23
 
Income (loss) per share from discontinued operations – basic & diluted
 
$
0.00
   
$
(0.00)
   
$
0.00
   
$
(0.01)
 
Net income (loss) per share – basic & diluted
 
$
(0.08
 
$
0.13
   
$
(0.34
 
$
0.22
 
                                 
Weighted Average Common Shares Outstanding - basic
   
8,290,000
     
7,090,000
     
7,918,729
     
7,090,000
 
Weighted Average Common Shares Outstanding - diluted
   
8,290,000
     
7,090,000
     
7,918,729
     
7,090,000
 

 

 
5

 
 
 
Game Trading Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
   
For the Six Months Ended June 30,
 
   
2010
   
2009
 
Cash flows from operating activities
  (As Restated) See Note 2        
Net Income (Loss)
 
$
(2,280,047
)
 
$
1,543,998
 
                 
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
               
Depreciation & Amortization  - Property and Equipment
   
35,299
     
33,393
 
Issuance of Stock Warrants for Services
   
1,579,689
     
-
 
Stock Options for employee services
   
673,966
     
-
 
Other
   
12,317
     
(4,867
Changes in assets and liabilities
               
Account receivable
   
(206,345
)
   
(1,617,003
)
Inventory
   
(2,352,775
)
   
1,431,716
 
Accounts payable
   
(1,515,038
   
818,902
 
Accrued liabilities
   
8,473
     
564
 
Deferred Expenses
   
9,801
     
4,736
 
Prepaid expenses and other
   
(690,971
)
   
-
 
Liabilities of discontinued operation
   
(67,186
)
   
-
 
                 
Net Cash Provided (Used) In Operating Activities
   
(4,792,817
)
   
2,211,439
 
                 
Cash flows from investing activities
               
Purchases of fixed assets
   
(268,615
)
   
(34,643
                 
Net Cash Provided (Used) In Investing Activities
   
(268,615
)
   
(34,643
                 
Cash flows from financing activities
               
Proceeds from the sale of convertible preferred stock
   
5,675,000
     
-
 
Proceeds from line of credit, net
   
2,063,285
     
(600,000
Repayments on notes payable
   
(2,750,000
)
   
(112,500
)
Payment of Series A preferred dividends
   
(18,958
   
-
 
Advance (Repayment) of due to stockholder
   
-
     
(20,000
)
Issuance (Repayment) of note payable-related party
   
(390,022
   
(181,107
)
                 
Net Cash Provided (Used) In Financing Activities
   
4,579,305
     
(913,607
)
                 
Net increase (decrease) in cash and cash equivalents
   
(482,127
)
   
1,263,189
 
                 
Cash and cash equivalents at the beginning of the period
   
641,088
     
301,397
 
                 
Cash and cash equivalents at the end of the period
 
$
158,961
   
$
1,564,586
 
                 
Supplemental disclosure of cash flow information :
               
                 
Cash paid for interest
 
$
83,267
   
$
355,878
 
                 
Cash paid for taxes
  $
-
    $
-
 
The accompanying notes are integral parts of these financial statements.

 
 
6

 
 

GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
 
1. 
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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.

Business Combination and Corporate Restructure

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 were 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. 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.

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. 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 20, 2015.
 
 
7

 
 
 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 

On April 26, 2010, the holders of certain Unit Purchase Options 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.

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.  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.

Concentration of Credit Risk

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents.  The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of FDIC insurance limits. Management considers this to be an acceptable business risk.

Cash and Cash Equivalents

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.
 
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 June 30, 2010 and December 31, 2009 respectively.  During the six months ended June 30, 2010 and  the year ended December 31, 2009, the Company wrote off $0 and $248,957 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 Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 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 June 30, 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

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 $6,631,951 and $18,033,238 and $12,998,799 and $21,339,859 in revenue for the three and six months ended June 30, 2010 and June 30, 2009, respectively.

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.

Shipping and Handling Costs

The Company includes its outbound shipping and handling costs in selling, general and administrative expenses.  Those costs were $141,817 and $387,568 for the three and six months ended June 30, 2010 and  $89,193 and $220,867 for the three and six months ended June 30, 2009, respectively.  Inbound shipping and handling costs are included as an allocation to inventory.  Those costs were $65,517 and $148,086 for the three and six months ended June 30, 2010 and $302,827 and $655,072 for the three and six months ended June 30 2009, respectively.
 
 
9

 
 
 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
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.

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.
 
Derivative Instruments and Hedging
 
In June 2008, the FASB issued new accounting guidance which requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. See Note 6.

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.
 
 
10

 
 

 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 

 
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 June 30, 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.
    
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 June 30, 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 $21,735 and $88,921 existed at June 30, 2010 and December 31, 2009. The Company recognized a loss from discontinued operations totaling $0 and $35,653 and $0 and $68,809 for the three and six months ended June 30, 2010 and 2009, 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.  In conjunction with the discontinued operations, the Company has certain operating lease obligations for abandoned retail locations. These obligations were terminated with the landlord in exchange for a termination fee of $35,524 in July 2010.

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.

Liquidity

As shown in the accompanying condensed consolidated financial statements, the Company has incurred a net loss from continuing operations of ($2,280,047) for the six months end June 30, 2010 and a net income from continuing operations of $1,612,807 for the six months ended June 30, 2009.  As of June 30, 2010, the Company’s current assets exceed its current liabilities by $3,779,386, with cash and cash equivalents representing $158,961.

Recent Authoritative Accounting Pronouncements

In February 2010, the FASB Accounting Standards Update 2010-10 (ASU 2010-10), “Consolidation (Topic 810): Amendments for Certain Investment Funds.”  The amendments in this Update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009 and for interim periods within that first reporting period. Early application is not permitted.  The adoption of provisions of ASU 2010-10 does not have a material effect on the Company’s financial position, results of operations or cash flows.
 
ASU No. 2010-11 was issued in March 2010, and clarifies that the transfer of credit risk that is only in the form of subordination of one financial instrument to another is an embedded derivative feature that should not be subject to potential bifurcation and separate accounting.  This ASU will be effective for the first fiscal quarter beginning after June 15, 2010, with early adoption permitted. The Company does not expect the provisions of ASU 2010-11 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
 
11

 
 

 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
 
In April 2010, the FASB issued Accounting Standard Update No. 2010-12. “Income Taxes” (Topic 740). In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-12 (ASU 2010-12),  IncomeTaxes (Topic 740): Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts.   After consultation with the FASB, the SEC stated that it “would not object to a registrant incorporating the effects of the Health Care and Education Reconciliation Act of 2010 when accounting for the Patient Protection and Affordable Care Act”. The Company does not expect the provisions of ASU 2010-12 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
ASU No. 2010-13 was issued in April 2010, and will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades.  This ASU will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
In April 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-18 “Receivables (Topic 310) – Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset – a consensus of the FASB Emerging Issues Task Force.”  ASU 2010-18 provides guidance on account for acquired loans that have evidence of credit deterioration upon acquisition. It allows acquired assets with common risk characteristics to be accounted for in the aggregate as a pool.  ASU 2010-18 is effective for modifications of loans accounted for within pools under Subtopic 310-30 in the first interim or annual reporting period ending on or after July 15, 2010.  The Company does not expect ASU 2010-18 to have an impact on its financial condition, results of operations, or disclosures.
 
In May 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-19 (ASU 2010-19), Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this Update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.

There were various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.
 
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
 
 
12

 
 
 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
2.
Restatement of Financial Statement
 
We have restated our previously issued condensed consolidated financial statements as of and for the three and six months ended June 30, 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 three and six months ended June 30, 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.
 
·  
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.
 
·  
The Company determined it had not properly calculated the costs of sales utilizing the average costs method for three and six months ended June 30, 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 inventory in the amount of approximately $329,000  for the three months ended June 30, 2010 and increasing the cost of sales and inventory in the amount of approximately $92,000 for the six months ended June 30, 2010.
 
·  
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.
 
1Interpretive Response to Question 5 under Staff Accounting Bulletin (SAB) 107.
 
 
 
 
13

 
 
 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 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 quarter ended June 30, 2010:
 
 
 
Game Trading Technologies, Inc. and Subsidiary
 
Consolidated Balance Sheets
 
   
As Originally Reported
         
As Restated
 
   
June 30,
 2010
    Adjustments    
June 30,
2010
 
ASSETS
                 
                   
Current Assets
                 
Cash and cash equivalents
  $ 158,961     $ -     $ 158,961  
Accounts Receivable, net
    2,590,033       -       2,590,033  
Inventories
    5,343,026       (92,818 )     5,250,208  
Prepaid Expenses
    690,971       -       690,971  
TOTAL CURRENT ASSETS
    8,782,991       (92,818 )     8,690,173  
                         
Property and Equipment, net
    343,300       -       343,300  
Other Assets
    -               -  
                         
TOTAL ASSETS
  $ 9,126,291       (92,818 )   $ 9,033,473  
                         
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
                       
Current Liabilities
                       
Accounts payable
  $ 2,738,358       -     $ 2,738,358  
Product financing - related party
    -       -       -  
Accrued expenses and other
    69,007       -       69,007  
Revolvling Line of Credit
    2,063,285       -       2,063,285  
Note payable - TW development LLC - related party
    18,402               18,402  
Discontinued Operations-Liablilties
    21,735       -       21,735  
TOTAL CURRENT LIABILITES
    4,910,787       -       4,910,787  
                         
Long Term Liabilities
    -       -       -  
TOTAL LIABILITIES
    4,910,787       -       4,910,787  
                         
 Redeemable preferred stock, Series A
    385,173       -       385,173  
                         
Stockholders' Equity (Deficit)
                       
                         
 Common stock
    829       -       829  
Additional paid-in capital
    8,219,925       (560,133 )     7,659,792  
Accumulated deficit
    (4,390,423 )     467,315       (3,923,108 )
Total stockholders' equity
    3,830,331       (92,818 )     3,737,513  
                         
TOTAL LIABILITIES AND STOCKHOLDERS'
  $ 9,126,291       (92,818 )   $ 9,033,473  
                         
 
 
 
14

 
 
 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
 
Game Trading Technologies, Inc. and Subsidiary
 
Consolidated Statements of Operations
 
(Unaudited)
 
                   
   
For the Three Months Ended June 30
 
   
2010
         
2010
 
   
As Originally Reported
    Adjustments    
As Restated
 
Net Sales
  $ 6,631,951       (124,000 )   $ 6,507,951  
Cost of Sales
    5,852,764       (399,884 )     5,452,880  
Gross Profit
    779,187       275,884       1,055,071  
                         
Operating Expense :
                       
Selling, general and administrative
    1,278,620       -       1,278,620  
Employee stock based compensation
    372,559       15,374       387,933  
Non-employee stock based compensation
    -       -       -  
Depreciation
    11,235       -       11,235  
Total Operating Expense:
    1,662,414       15,374       1,677,788  
                         
Income (Loss) From Operations
    (883,227 )     260,510       (622,717 )
                         
Other Income (Expense):
                       
Interest Expense
    (18,333 )     -       (18,333 )
Other income
    -       -       -  
Total Other Expense
    (18,333 )     -       (18,333 )
                         
Income (Loss) From Continuing Operations Before Income Taxes
    (901,560 )     -       (641,050 )
 
Accretion of preferred dividends and discount
    66,007       -       66,007  
Accretion of preferred amortization of beneficial conversion and warrant features
    319,166       (65,000 )     254,166  
                         
Net Income (Loss) attributable to common shareholders
  $ (1,286,733 )     325,510     $ (961,223 )
                         
 Net Income (Loss) per share:
                       
Net income (loss) per share – basic & diluted
  $ (0.16 )           $ (0.12 )
                         
Weighted average shares outstanding of common stock
                       
Basic & Diluted
    8,290,000               8,290,000  
   
 
 
 
15

 
 
 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
 
Game Trading Technologies, Inc. and Subsidiary
 
Consolidated Statements of Operations
 
(Unaudited)
 
                   
   
For the Six Months Ended
June 30
 
   
2010
         
2010
 
   
As Originally Reported
    Adjustments    
As Restated
 
Net Sales
  $ 18,033,238           $ 18,033,238  
Cost of Sales
    15,281,415       92,818       15,374,233  
Gross Profit
    2,751,823       92,818       2,659,005  
                         
Operating Expense :
                       
Selling, general and administrative
    2,613,323       -       2,613,323  
Employee stock based compensation
    1,317,765       (643,799 )     673,966  
Non-employee stock based compensation
    1,496,023       83,666       1,579,689  
Depreciation
    35,299       -       35,299  
Total Operating Expense:
    5,462,410       (560,133 )     4,902,277  
                         
Income (Loss) From Operations
    (2,710,587 )     467,315       (2,243,272 )
                         
Other Income (Expense):
                       
Interest Expense
    (83,268 )     -       (83,268 )
Other income
    46,493       -       46,493  
Total Other Expense
    (36,775 )     -       (36,775 )
                         
Income (Loss) From Continuing Operations Before Income Taxes
    (2,747,362 )     467,315       (2,280,047 )
                      -  
Accretion of preferred dividends and discount
    84,965       -       84,965  
Accretion of preferred amortization of beneficial conversion and warrant features
    319,166       -       319,166  
                         
Net Income (Loss) attributable to common shareholders
  $ (3,151,493 )     467,315     $ (2,684,178 )
                         
 Net Income (Loss) per share:
                       
                         
Net income (loss) per share – basic & diluted
  $ (0.39 )           $ (0.34 )
                         
Weighted average shares outstanding of common stock
                       
Basic & Diluted
    7,918,729               7,918,729  
   
 
 
16

 
 
 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
Game Trading Technologies, Inc. and Subsidiary
 
Consolidated Statements of Cash Flows
 
(Unaudited)
 
                   
   
For the Period Ended
 June 30,
 
   
2010
         
2010
 
 Cash flows from operating activities
 
As Originally Reported
    Adjustments    
As Restated
 
 Net Income (Loss)
  $ (2,747,362 )   $ 467,315     $ (2,280,047 )
                         
 Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
                       
 Depreciation & Amortization  - Property and Equipment
    35,299               35,299  
 Issuance of Stock Warrants for Services
    1,496,024       83,666       1,579,690  
 Stock Options for employee services
    1,317,765       (643,799 )     673,966  
 Other
    12,317       -       12,317  
 Changes in assets and liabilities
                       
 Account receivable
    (206,345 )     -       (206,345 )
     Inventory
    (2,445,594 )     92,818       (2,352,776 )
 Accounts payable
    (1,515,038 )     -       (1,515,038 )
 Accrued liabilities
    8,473       -       8,473  
 Deferred Expenses
    9,801       -       9,801  
 Prepaid expenses and deposits
    (690,971 )     -       (690,971 )
 Liabilities of discontinued operation
    (67,186 )     -       (67,186 )
                         
 Net Cash Provided (Used) In Operating Activities
    (4,792,817 )     -       (4,792,817 )
                         
 Cash flows from investing activities
                       
 Purchases of fixed assets
    (268,615 )     -       (268,615 )
                         
 Net Cash Provided (Used) In Investing Activities
    (268,615 )     -       (268,615 )
    Cash flows from financing activities
                       
Proceeds from the sale of convertible preferred stock
    5,675,000       -       5,675,000  
Net borrowings (repayment) in connection with Product financing facilities
    -               -  
Increase (Decrease) in working line of credit
    2,063,285       -       2,063,285  
Payments on Series A Preferred Dividends
    (18,958 )     -       (18,958 )
Issuance (Repayment) of note payable - related party
    (390,022     -       (390,022 )
Issuance (Repayment) of note payable
    (2,750,000 )     -       (2,750,000  
                         
 Net Cash Provided (Used) In Financing Activities
    4,579,305       -       4,579,305  
                         
 Net increase (decrease) in cash
    (482,127 )     -       (482,127 )
                         
 Cash and cash equivalents at the beginning of the period
    641,088       -       641,088  
                         
 Cash and cash equivalents at the end of the period
  $ 158,961     $ -     $ 158,961  
                         


 
 
 
17

 
 
 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
 
3. 
PROPERTY AND EQUIPMENT
 
The Company’s property and equipment at June 30, 2010 and December 31, 2009 consists of the following:

   
6/30/10
   
12/31/09
 
Machinery and equipment
 
$
522,375
   
$
251,347
 
Leasehold improvements
   
16,653
     
19,483
 
Computer equipment and software
   
142,641
     
142,223
 
   
$
681,669
   
$
413,053
 
Less accumulated depreciation
   
338,369
     
303,069
 
Property and Equipment, net
 
$
343,300
   
$
109,984
 
 
Depreciation expense included as a charge to income was $11,235 and $35,299 for the three and six months end June 30, 2010 compared to $17,123 and $33,393 for the three and six months ended June 30, 2009, respectively.
 
 
18

 
 

 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
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 June 30, 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.
 
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.

6. 
Working Capital Line of Credit
 
Bank of America Revolver

On May 4, 2010, Gamers Factory, Inc. (the “Borrower”), a wholly owned subsidiary of 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. The Company has incurred interest expense of $8,716 for the three and six months end June 30, 2010. The BBA LIBOR rate was .35%.

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 June 30, 2010, the balance on the revolver was $2,063,285, with additional availability of $436,715.
 
 
7. 
NOTES PAYABLE
 
A summary of notes payable at June 30, 2010 and December 31, 2009 is as follows:

   
6/30/10
   
12/31/09
 
Allegiance Capital Limited
 
$
-
   
$
700,000
 
The Columbia Bank
   
-
     
1,800,000
 
Vision Capital Advisors, Ltd.
   
-
     
250,000
 
   
$
-
   
$
2,750,000
 
Less: Current Portion
   
-
     
513,046
 
Notes Payable
 
$
-
   
$
2,236,954
 

Subordinated Note Payable – Allegiance Capital Limited
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 –  The Columbia Bank
On December 29, 2009 the Company was issued a note payable of $1,800,000 from The Columbia Bank. The note bears interest at 8.0% and matures on December 29, 2014.  The note required consecutive monthly payments of principal and interest of $15,056 with a balloon payment due on December 29, 2014.    The note was collateralized by substantially all assets of the Company and personal assets of the majority shareholder.  This note was retired utilizing proceeds from the April 2010 private placement transaction without penalty or additional interest.

Note Payable – Vision
On December 22, 2009, Vision Capital Advisors, Ltd. issued a note payable of $250,000. The note bears interest at 8.0% and matured on June 30, 2010.  The note required a payment of principal and interest due on June 30, 2010.    This note was not collateralized.  This note was retired utilizing proceeds from the February 2010 private placement transaction without penalty or additional interest.


 
19

 
 

 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
8. 
NOTES PAYABLE – RELATED PARTY
 

Note Payable – TW Development LLC

On December 6, 2007, the Company issued a note payable of $500,000 to TW Development LLC. The note bears interest at 6% and matured on April 4, 2008, and has been extended to December 31, 2010.  The note requires no monthly payments and at times in the current year, the Company has attained, and subsequently repaid, additional advances. The Company may repay this note at any time, in whole or in part, without penalty or additional interest. The balance as of June 30, 2010 and December 31, 2009 was $18,402 and $408,424, respectively. TW Development LLC is wholly owned by, our Chief Executive Officer, Todd Hays.
 
 
9. 
REDEEMABLE PREFERRED STOCK
 
A summary of the Redeemable Preferred Stock at June 30, 2010 and December 31, 2009 is as follows:
 
   
6/30/10
   
12/31/09
 
Redeemable preferred stock, Series A
 
$
5,675,000
   
$
-
 
Beneficial conversion feature, net of accumulated amortization of $117,424 and $0 at June 30, 2010 and December 31, 2009, respectively.
   
(1,949,969
   
-
 
Value attributable to warrants attached to notes, net of accumulated amortization of $201,742 and $0 at June 30, 2010 and December 31, 2009, respectively.
   
(3,405,865
   
-
 
Accumulated Dividends
   
66,007
     
-
 
   
$
385,173
   
$
-
 

 
We are authorized to issue shares of our Series A Convertible Preferred Stock (“Series A”), $2.00 stated value. As of June 30, 2010, 20,000,000 shares of our Preferred Stock were authorized, with 2,837,500 shares designated as Series A, and 2,837,500 shares issued and outstanding. The rights and preferences of the Series A Convertible Preferred Stock include, among other things, the following:
 
 
·
liquidation preferences (120% of stated value);

 
·
dividend preferences;

The Series A Convertible Preferred Stock provides an annual dividend of 5% payable quarterly in arrears in cash or stock.  Each Series A Preferred share 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, 2009, the Company sold 1,950,000 shares of Series A 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 Series A shares. Since the Series A 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 June 30, 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 GTTI 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).

 On April 20, 2010 and April 26, 2010, certain holders of Unit Purchase Options exercised Unit Purchase Options to purchase 825,000 and 62,500 shares, respectively of Series A resulting in aggregate gross proceeds to us of $1,650,000 and $125,000, respectively. Since the Series A 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 June 30, 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 $1,162,878 using the Black Scholes option pricing model. Further, the Company attributed a beneficial conversion feature of $612,122 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 GTTI common stock of $4.70 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 $1,775,000, 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 April 2015 (the initial redemption date) as a charge to additional paid-in capital (since there is a deficit in retained earnings).
 
20

 
 

 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 

The charge to additional paid in capital for amortization of discount and costs for the period ended June 30, 2010 was $319,166.  There was no amortization of discounts for Series A preferred stock for the period ended June 30, 2009.

For the period ended June 30, 2010 we have paid dividends in the amount of $18,958 and cumulative accrued dividends of $66,007. 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 June 30, 2009.
 
10. 
CAPITAL STOCK
 
The Company has authorized 20,000,000 shares of preferred stock, with a par value of $.0001 per share. As of June 30, 2010, the Company has 2,837,500 shares of preferred stock issued and outstanding, designated Series A preferred stock. 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 June 30, 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.
 
 
11.
STOCK OPTIONS & WARRANTS
 
Employee Stock Options

The following table summarizes the changes in the options outstanding at June 30, 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
     
4.66
     
0
   
$
2.25
 
 
2.50
     
50,000
     
2.50
     
4.69
     
16,666
     
2.50
 
 
4.60
     
100,000
     
4.60
     
4.69
     
33,334
     
4.60
 
 
4.75
     
60,000
     
4.75
     
4.81
     
20,000
     
4.75
 
         
1,210,000
             
4.67
     
70,000
         

A summary of the Company’s stock awards for options as of December 31, 2009 and changes for the six months ended June 30, 2010 is presented below:

   
Options 
and Warrants
   
Weighted
Average
Exercise
Price
 
Outstanding, December 31, 2009
   
   
$
 
Granted
   
1,210,000
     
2.58
 
Exercised
   
     
 
Expired/Cancelled
   
     
 
Outstanding, June 30, 2010
   
1,210,000
     
2.58
 
Exercisable, June 30, 2010
   
70,000
     
2.58
 

 
21

 
 

 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
 
 
 The weighted-average fair value of stock options granted to employees during the six-month period ended June 30, 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:

   
June 30, 2010
   
June 30, 2009
 
Significant assumptions (weighted-average):
           
Risk-free interest rate at grant date
   
3.5
 %    
-   
 
Expected stock price volatility
   
45
 %    
-   
 
Expected dividend payout
   
-    
     
-    
 
Expected option life (in years)
   
5.0 
     
-   
 
Expected forfeiture rate
   
0
 %    
-   
 
Fair value per share of options granted
 
$
3.36
   
$
-   
 

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 peices 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 and six months ended June 30, 2010 was $387,934 and $673,966 and for the three and six months ended June 30, 2009 was $0, respectively, net of tax effect. Additionally, the aggregate intrinsic value of options outstanding and unvested as of June 30, 2010 is $0.

Warrants

The following table summarizes the changes in the warrants outstanding at June 30, 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
     
3.53
     
1,120,000
   
$
.65
 
 
2.50
     
2,927,500
     
2.50
     
4.66
     
2,927,500
     
2.50
 
                                             
         
4,047,500
             
4.24
     
4,047,500
         
 
 
22

 
 

 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 
 
A summary of the Company’s stock awards for warrants as of December 31, 2009 and changes for the six months ended June 30, 2010 is presented below:

   
Options 
and Warrants
   
Weighted
Average
Exercise
Price
 
Outstanding, December 31, 2009
   
1,110,000
   
$
0.65
 
Granted
   
3,237,500
     
2.50
 
Exercised
   
     
 
Expired/Cancelled
   
(300,000
)    
0.65
 
Outstanding, June 30, 2010
   
4,047,500
     
1.99
 
Exercisable, June 30, 2010
   
4,047,500
     
1.99
 

The Company issued 2,837,500 warrants to Series A preferred stockholders and 400,000 compensatory warrants to non-employees during the six months ended June 30, 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 and six months ended June 30, 2010  $0 and $1,579,690 and for the three and six months ended June 30, 2009 was $0, respectively, net of tax effect.
 
12. 
RELATED PARTY TRANSACTIONS
 
The Company has a note payable outstanding of $18,402 due to TW Development, LLC, a company wholly owned by Todd Hays, our chief executive officer.  The note bears interest at 6% and due no later than December 31, 2010. For information regarding the note payable, see “Note Payable – Related Party” in Note 5 of the Notes to Unaudited Condensed Consolidated Financial Statements contained herein.

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

In connection with the Series A Preferred Stock private placement transaction, on April 20, 2010, the Company entered into an Executive Officer Reimbursement Agreement with Todd Hays, the Company’s President and Chief Executive Officer, pursuant to which the Mr. Hays agreed to convert a portion of outstanding indebtedness of the Company owed to him into Series A shares and Warrants pursuant to the Securities Purchase Agreement.  Mr. Hays converted $25,000 of outstanding indebtedness into 12,500 Series A shares and Warrants to purchase 12,500 shares of Common Stock.
 
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 .

From time to time the Company may receive advances from certain of its officers to meet short term working capital needs.  These advances may not have formal repayment terms or arrangements.  

13. 
BUSINESS CONCENTRATION
 
Revenue from two (2) major customers accounted for a combined $14,348,707 and $17,684,177 of revenue for the six months ended June, 2010 and 2009, respectively.  These amounts represent 80% and 83% of the Company’s revenue for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and 2009, these customers accounted for 31% and 92% of accounts receivable, respectively.

Purchases from two (2) major suppliers approximated $5,597,838 of purchases, and three (3) major suppliers approximated $8,879,575 of purchases, for the six months ended June 30, 2010 and 2009, respectively. These amounts represent 34% and 59% of the Company’s supplies for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and 2009, these suppliers accounted for 25% and 0% of accounts payable, respectively.
 
14. 
COMMITMENTS
 
Office Lease Obligations

The Company has entered into an operating lease agreement for its warehouse and corporate offices located in Hunt Valley, MD.   The current lease term expiration date is January 31, 2012.
 
 
23

 
 

 
GAME TRADING TECHNOLOGIES, INC.
and Its Wholly Owned Subsidiary
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 2010
 

 
Future minimum payments required under operating leases at June 30, 2010 are as follows:

Year Ending December 31:
     
       
2010 (remainder of the year)
   
87,975
 
2011
   
179,223
 
2012 and thereafter
   
14,960
 
   
$
282,158
 

Rent expense plus common area maintenance and related facilities fees for the six months ended June, 2010 and 2009 totaled $105,623 and $115,565, respectively.
 
In conjunction with the discontinued operations (see “Discontinued Operations” in Footnote 1.), the Company has certain operating lease obligations for abandoned retail locations. These obligations were terminated with the landlord in exchange for a termination fee of $35,524 in July 2010.
 
Employment and Consulting Agreements

The Company has employment agreements with certain of its key employees which include non-disclosure and confidentiality provisions for the protection of the Company’s proprietary information.

We entered into employment agreements with Todd Hays and Rodney Hillman effective at the closing of the Transaction and our February 2010 private placement. The employment agreements require each of the executives to devote all of their time and attention during normal business hours to our business as our Chief Executive Officer and President and our Chief Operating Officer, respectively. The employment agreements provide that each executive will receive an annual base salary of $175,000 and $125,000 per year, with the annual base salary increasing by 5% on each anniversary date of the employment agreement. In addition, each executive is entitled to (a) receive a cash bonus in an amount determined by the Compensation Committee if we meet or exceed certain mutually agreed upon performance goals and (b) participate in our stock option plan.
 
15. 
SUBSEQUENT EVENTS
 
The Company evaluated for subsequent events through the issuance date of the Company’s financial statements and the following items are noted.

In conjunction with the discontinued operations (see “Discontinued Operations” in Footnote 1.), the Company has certain operating lease obligations for abandoned retail locations. These obligations were terminated with the landlord in exchange for a termination fee of $35,524 in July 2010.
 
Effective June 30, 2010, the holders of 100% of the outstanding shares of series A convertible preferred stock (the “Series A Preferred Stock”) and 98% of the outstanding warrants to purchase shares of common stock (collectively, the “Warrants”) issued pursuant to the terms of that certain securities purchase agreement, dated February 25, 2010 (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.
 
 
 
24

 


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 first amendment, we have restated our condensed consolidated financial statements for the quarterly period ended June 30, 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 three and six months ended June 30, 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.
 
Overview
 
We are 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.

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.

Recent Developments

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. 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 20, 2015.

On April 26, 2010, the holders of certain Unit Purchase Options exercised Options to purchase 62,500 units of the Company’s securities for aggregate gross proceeds of $125,000.  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 26, 2015.
 
 
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Results of Operations - Three Months and Six Months ended June 30, 2010 compared to the Three and Six Months ended June 30, 2009

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

 
Three months ended June 30,
 
 
2010
 
2009
 
Variance
 
 
 
   
 
 
 
   
 
 
 
   
 
 
Revenue
  $ 6,507,951       100 %   $ 12,998,799       100 %   $ (6,490,848 )     -50 %
Cost of Sales
    5,452,880       84 %     11,168,226       86 %     (5,715,346     -51 %
Gross Profit
  $ 1,055,071       16 %   $ 1,830,573       14 %   $ (775,502 )     -42 %
 
 
Six months ended June 30,
 
 
2010
 
2009
 
Variance
 
 
 
   
 
 
 
   
 
 
 
   
 
 
Revenue
  $ 18,033,238       100 %   $ 21,339,859       100 %   $ (3,306,621 )     -16 %
Cost of Sales
    15,374,233       85 %     18,067,719       85 %     (2,693,486     -15 %
Gross Profit
  $ 2,659,005       15 %   $ 3,272,140       15 %   $ (613,135 )     -19 %

Revenues . During the three and six months ended June 30, 2010, we had a decrease in revenues of $6,490,848, or -50% and $3,306,621, or -16%, respectively, compared to the three and six months ended June 30, 2009.  Excluding a major extraordinary retailer liquidation transaction consisting of approximately $5.5 million in sales in the 2nd quarter of 2009, revenues would have shown a decrease of approximately $1,000,000 for the comparative three month period and increased approximately $2.2 million for the comparative six month period. As demonstrated in the corresponding prior year period, from time to time larger than normal opportunities are made available to us for the acquisition and/or sale of used game products. These opportunities are not in the normal course of our business and there is no assurance when or if such opportunities will be made available to us in the future.
 
Cost of Sales . During the three and six months ended June 30, 2010, we had a decrease in cost of sales of $5,715,346, or -51%, and $2,693,486, or -15%, respectively, compared to the three and six months ended June 30, 2009. Our decrease in costs correlate with the decrease in revenue for the comparable periods.
 
Gross Profit. Gross profit decreased by $775,502, or -42%, and $613,135, or -19%, for the three and six months ended June 30, 2010, respectively, when compared to the three and six month period ended June 30, 2009. The decrease during the three and six months ended June 30, 2010 was primarily a resulting of lower sales volumes as compared to the prior periods.
  
Operating Expense . Operating expenses, which consist of sales and marketing expenses, general and administrative costs, stock based compensation and depreciation totaled $1,677,788 and $4,902,277 during the three and six months ended June 30, 2010, respectively as compared to $667,051 and $1,303,455 during the three and six months ended June 30, 2009, respectively. The operating expenses for the three and six months ended June 30, 2010 increased by $1,010,737 and $3,598,822, respectively, as compared to the three and six months ended June 30, 2009. The major component of these increased expenses between the corresponding periods was professional services consisting of legal, accounting and investor relations fees as well as non-cash employee stock based compensation of $387,933 and $673,966 and non-employee stock based compensation of $0 and $1,579,689 for the three and six months ended June 30, 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 $1,278,620 and $2,613,323 during the three and six months ended June 30, 2010, respectively, as compared to $649,928 and $1,270,062 during the three and six months ended June 30, 2009, respectively. SG&A increased by $628,692 and $1,343,261 between the corresponding three and six months periods, respectively. The increase between the corresponding three and six month periods is primarily attributable to professional fees associated with the reverse merger and private placement consummated in February 2010 and investor relations fees totaling approximately $311,000 and $813,000, respectively. Furthermore, administrative salaries and related costs increased approximately $205,000 and $229,000, a comparable increase in volume of small package shipments in outbound shipping costs increased approximately $52,000 and $167,000, and IT related services increased approximately $48,000 and $115,000, respectively between the three and six months comparative periods.
 
 
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Stock Based Compensation . During the three and six months ended June 30, 2010, the employee stock based compensation expense was $387,933 and $673,966, respectively 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 with the first installment to be exercisable upon issuance of the option agreement. There were no stock option issuances in the prior year period.
 
Non-Employee Stock Based Compensation . For the three and six months ended June 30, 2010, $0 and $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 ($641,050) and ($2,280,047) for the three and six months ended June 30, 2010 as compared to a net income of $951,517 and $1,612,807 for the three and six 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 $3,181,499 during the six months ended June 30, 2010 from a working capital surplus of $597,887 at December 31, 2009 to a working capital surplus of $3,779,386 at June 30, 2010. The change in working capital for the six months ended June 30, 2010 is due to a combination of factors, of which significantly include:
     
 
 
Cash had a net decrease from working capital by $482,127 for the six months ended June 30, 2010. The most significant uses and proceeds of cash were:
     
   
· Approximately $4,793,000 of cash consumed directly in operating activities
   
· Purchases of equipment of $268,615
   
· Proceeds from the Series A Preferred offering of $5,675,000
   
· Net proceeds from the Bank of America working line of credit of $2,063,285 to fund inventory purchases
   
· Repayments of certain notes payable outstanding of $3,140,022
  
Of the total current assets of $8,690,173 as of June 30, 2010, cash represented $158,961.  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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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. 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 20, 2015.

On April 26, 2010, the holders of certain Unit Purchase Options exercised Options to purchase 62,500 units of the Company’s securities for aggregate gross proceeds of $125,000.  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 26, 2015.

Working Capital Line of Credit

On May 4, 2010, Gamers Factory, Inc. (the “Borrower”), a wholly owned subsidiary of 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.

Initial borrowings under the Loan Agreement were 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 June 30, 2010, the balance on the revolver was $2,063,285, with additional availability of $436,715.

Proceeds from the issuance of common stock

During the three months ended June 30, 2010, the Company did not receive any proceeds from the issuance of its common stock.

Cashflow analysis

Cash used in operations was $4,792,817 during the period ending June 30, 2010 and proceeds provided by operations was $2,211,439 during the period ended June 30, 2009. During the period ended June 30, 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 $268,615 and $34,643 during the periods ended June 30, 2010, and 2009, respectively. This increase is primarily attributable to the acquisition of additional computer and warehouse equipment.

Cash provided from financing activities of $4,579,305 during the period ending June 30, 2010, compared to cash used in financing activities was $913,607 during the period ending June 30, 2009. This increase is primarily attributable to funds received from the February and April 2010 Series A preferred private placements of $5,675,000 and proceeds on our working capital line of credit used for inventory purchases of $2,063,285. The financing activities also included repayments of certain notes payable of $3,140,022 and $913,607 during the period ending June 30, 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.
  
 
 
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Off-Balance Sheet Arrangements
 
As of June 30, 2010, we had no off-balance sheet arrangements.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
None.
 
Item 4.        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 June 30, 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 as of June 30, 2010 our disclosure controls and procedures and based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the items set forth below:
 
·  
 The Company did not have sufficient oversight to ensure the 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.
 
·  
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.
 
 
 
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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 First 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 First 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 First 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.
 
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
 
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this item.

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.
 
 
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 and Chief Financial Officer.

 
 
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SIGNATURES
 
In accordance with the requirements of the Exchange Act, 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
 
       
 
 
 
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