Form 10QSB for TEN STIX INC
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21-Nov-2003

Quarterly Report

Item 2- Management's Discussion and Analysis of Financial Position and Results of Operations.
Cautionary Forward - Looking Statement

The following discussion should be read in conjunction with the Company's financial statements and related notes.

Certain matters discussed herein may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties include, but are not limited to, the following:

- the volatile and competitive nature of the industry, - the uncertainties surrounding the rapidly evolving markets in

which the Company competes,
- the uncertainties surrounding technological change of the
industry,
- the Company's dependence on its intellectual property rights,
- the success of marketing efforts by third parties,
- the changing demands of customers and
- the arrangements with present and future customers and third
parties.

Should one or more of these risks or uncertainties materialize or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated.

BUSINESS OVERVIEW

Ten Stix Inc. (the "Company") was incorporated on January 10, 1996 under the laws of the State of Colorado to engage in the design, development and marketing of unique card games, of which some are derived from Native American heritage, and other gaming products for the gaming industry. The Company named itself "Ten Stix" based on its most popular and creative product known as "Ten Stix 21" (currently being marketed and referenced herein as "Ten to Win"). The Company has designed and developed certain card games, which are currently being marketed to casinos located in the States of California, Colorado, Kansas, New Mexico, Nevada, South Dakota and Wisconsin.

The Company has designed and developed a line of card games and other gaming products for the gaming industry. There are two types of gaming products that the Company has designed and will distribute and market. One type of gaming product is the "table game with electronics", which includes Ten to Win and Shotgun 21. Both the Ten to Win and Shotgun 21 card games utilize an electronics system that was designed and developed by the Company and which provides, among other things, the managers of casinos with an accounting system allowing for real-time win/loss statistics. The basic unit hardware is the same for the two card games, although the Shotgun 21 electronics system has certain modifications and will perform more sophisticated functions. The other type of gaming product is a "layout game", which includes all of the other gaming products. The other gaming products of the Company utilize a tablecover or layout with no electronic system. The Company offers no warranty pursuant to the sale or lease of any of its gaming products.

During the nine-month period ended September 30, 2003, the Company generated approximately $74,762 in revenues from the sale and/or lease of its gaming products. Management of the Company believes that the Company will continue to generate such revenues. Management further believes that there are

certain material factors applicable to all of the Company's products relevant to the generation of revenues which include, but are not limited to, the following: (i) adequate capital required to fund operational expenses, which directly and adversely affects travel associated with the market and distribution of products; (ii) state approval of the specific game being marketed; and (iii) timely delivery of and/or back-ordered parts associated with particular games. Together with the specific material factors listed under the description of each gaming product, management believes that all such material factors have been disclosed pertaining to the timing of bringing each product to market and the generation of revenues.

Management of the Company believes that future sales of Ten to Win and related products to the casinos in the State of Colorado will be an important line of business for the Company for the next several years, however, management intends to pursue the marketplaces of several other primary states. It is anticipated that the Company will derive its revenues principally from the marketing and sale of Ten to Win and other related products to casinos generally located in the States of California, Colorado, Kansas, New Mexico, Nevada, South Dakota, Mississippi and Wisconsin. Management anticipates that Ten to Win will be leased for approximately $600.00 per month or sold for approximately $5,000.00 plus a royalty fee to casinos. Management anticipates that Shotgun 21 will be leased for approximately $800.00 per month or sold for approximately $10,000 plus a royalty fee to casinos. Management further anticipates that the marketing and sale of the products pursuant to the distributorship agreements will result in revenues during fiscal year 2003.

The Company's principal executive offices are located at 3101 Riverside Drive, Idaho Springs, Colorado 80542. Its telephone number is (303) 567.0163 and its facsimile number is (303) 567.0163. The Company's services and gaming products are also electronically advertised on the Company's web page at www.tenstix.com.

Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases and in oral statements made with the approval of an authorized executive officer which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) the extremely competitive conditions that currently exist in the market for companies similar to the Company and (ii) lack or resources to maintain the Company's good standing status and requisite filings with the Securities and Exchange Commission. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

RESULTS OF OPERATIONS

Nine-Month Period Ended September 30, 2003 Compared to Nine-Month Period Ended September 30, 2002

The Company's net loss for the nine-month period ended September 30, 2003 was $327,346 compared to a net loss of $142,291 for the nine-month period ended September 30, 2001 (an increase of $185,055).

Total revenue for the nine-month periods ended September 30, 2003 and 2002 were $74,762 and $88,063, respectively (a decrease of $13,301). Total revenue generated during the nine-month period ended September 30, 2003 and 2002 was comprised of gaming products, lease, royalties, and sales. The decrease in revenue during the nine-month period ended September 30, 2003 was primarily due to a decrease in fees generated from the marketing of the Company's gaming products.

During the nine-month period ended September 30, 2003, the Company incurred operating expenses of $389,388 compared to $218,413 of operating expenses incurred during the nine-month period ended September 30, 2002 (an increase of $170,975). Operating expenses for the nine-month period ended September 30, 2003 primarily consisted of: (i) $36,343 as depreciation expense; (ii) $344,912 as general and administrative expenses; and (iii) $8,133 as amortization expense. Operating expenses for the nine-month period ended September 30, 2002 primarily consisted of: (i) $33,987 as depreciation expense; (ii) $174,214 as general and administrative expenses; and (iii) $10,212 as amortization expense. The Company also incurred $12,720 as interest expense during the nine-month period ended September 30, 2003 as compared to $11,941 incurred during the nine-month period ended September 30, 2002. The increase in operational expenses during the nine-month period ended September 30, 2003 compared to the nine-month period ended September 30, 2002 was primarily due to an increase in general and administrative expenses resulting from an operational emphasis on and increased scale and scope of overall corporate activity pertaining to the marketing and distribution of the Company's gaming products (which was primarily attributable to an increase in salaries, professional fees and travel expenses). General and administrative expenses generally include corporate overhead, administrative management, consulting costs and professional fees.

As discussed above, although the Company generated revenues in the amount of $74,762 during the nine-month period ended September 30, 2003, the increase in net loss during such period compared to the nine-month period ended September 30, 2002 is attributable primarily to a substantial increase in general and administrative expenses. The Company's net loss during the nine-month period ended September 30, 2003 was approximately $327,346 or $0.02 per common share compared to a net loss of approximately $142,291 or $0.01 per common share during the nine-month period ended September 30, 2002. The weighted average common shares outstanding were 19,018,784 for the nine-month period ended September 30, 2003 compared to 17,659,488 for the nine-month period ended September 30, 2002.

Three-Month Period Ended September 30, 2003 Compared to Three-Month Period Ended September 30, 2002

The Company's net loss for the three-month period ended September 30, 2003 was $141,377 compared to a net loss of $102,345 for the three-month period ended September 30, 2002 (an increase of $39,032).

Total revenue for the three-month periods ended September 30, 2003 and 2002 was $26,012 and $48,536, respectively (a decrease of $22,524). The generation of revenue during the three-month period ended September 30, 2003 was comprised primarily of fees generated from the marketing of its gaming products.

During the three-month period ended September 30, 2003, the Company incurred operating expenses of $163,255 compared to $149,110 of operating expenses incurred during the three-month period ended September 30, 2002 (an increase of $14,145). Operating expenses for the three-month period ended September 30, 2003 primarily consisted of: (i) $12,050 as depreciation expense; (ii) $148,494 as general and administrative expenses; and (iii) $2,711 as amortization expense. This increase was primarily attributable to an increase in salaries, professional fees and travel expenses related to the marketing of the Company's gaming products. The Company also incurred $4,134 as interest expense during the three-month period ended September 30, 2003 as compared to $1,771 incurred as interest expense during the three-month period ended September 30, 2002.

As discussed above, although the Company generated revenue in the amount of $26,012 during the three-month period ended September 30, 2003, the increase in net loss during such period compared to the three-month period ended September 30, 2002 is attributable primarily to a substantial increase in general and administrative expenses. The Company's net loss during the three-month period ended September 30, 2003 was $141,377 or $0.01 per common share compared to a net loss of $102,345 or $0.01 per common share during the three-month period ended September 30, 2002. The weighted average of common shares outstanding were 19,221,114 and 17,659,488 for the three-month periods ended September 30, 2003 and 2002, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of the date of this Quarterly Report, management of the Company believes that an estimated $500,000 is required over the next fiscal year for payment of expenses associated with the ongoing business operations of the Company. The Company generated $88,063 in total revenue during the nine-month period ended September 30, 2002 and $74,762 in total revenue during the nine-month period ended September 30, 2003. Management anticipates that overall generation of revenues will increase on an annual basis based on existing contracts and marketability of its gaming products. Management believes that the Company can satisfy its cash requirements for approximately the next six months based on its ability to successfully generate revenues from the marketing of its gaming products and to obtain advances from certain investors and related parties, as necessary.

The Company has only recently generated sufficient cash flow to partially fund its operations and activities. The Company may experience a liquidity crisis and be required to raise additional capital. Historically, the Company has relied upon internally generated funds and funds from the sale of shares of stock and loans from its shareholders and private investors to finance its operations and growth. Management may raise additional capital through future public or private offerings of its stock or through loans from private investors, although there can be no assurance that the Company will be able to obtain such financing. The Company's future success and viability are entirely dependent upon the ability of the Company's current management to (i) strengthen and increase its customer base by enhancing the marketability of its products, and (ii) increase the number of customers and expand into additional markets. Management is optimistic that the Company will be successful in its capital raising efforts. There can be no assurance, however, that the Company will be able to continue to successfully distribute and market its gaming products and to raise additional capital. The Company's failure to do so would have a material and adverse affect upon the Company and its shareholders.

The Company's financial statements have been prepared assuming that it will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classifications of liabilities that might be necessary should the Company be unable to continue in operations.

For Nine-Month Period Ended September 30, 2003

As of September 30, 2003, the Company's current assets were $13,965 and its current liabilities were $507,399, resulting in a working capital deficit of $493,434. As of September 30, 2003, current assets were comprised of (i) $6,193 in cash; (ii) $4,995 in accounts receivable; and (iii) $2,777 in inventory. As of September 30, 2003, current liabilities were comprised of (i) $85,090 in accounts payable and accrued expenses; (ii) $68,915 in accounts payable to related party; (iii) $51,000 in accrued salary payable, and (iv) $302,394 in current portion of long-term debt due and owing.

As of September 30, 2003, the Company's total assets were $463,864 and its total liabilities were $507,399. As of September 30, 2003, the Company's total liabilities exceed its total assets by $43,535.

As of September 30, 2003, the Company's total assets consisted primarily of (i) $13,965 in current assets; (ii) $143,308 (less accumulated depreciation/amortization) in property and equipment; (iii) $78,403 net cost of patent/copyright rights; and (iv) $162,100 in valuation of gaming rights.

As of September 30, 2003, the Company's total liabilities consisted primarily of: (i) $302,394 in notes payable; (ii) $85,090 in accounts payable and accrued expenses; (iii) $68,915 in accounts payable to related parties; and (iv) $51,000 in accrued salary payable.

Stockholders' deficit for the nine-month period ended September 30, 2003 was $43,535.

For the nine-month period ended September 30, 2003, net cash used by operating activities was $136,192 compared to net cash used by operating activities of $71,102 for the nine-month period ended September 30, 2002. The increase in net cash flows used by operating activities during the nine-month period ended September 30, 2003 compared to the nine-month period ended September 30, 2002 resulted primarily from a $185,055 increase in net loss to $327,346 incurred during the nine-month period ended September 30, 2003 compared to a net loss of $142,291 incurred during the nine-month period ended September 30, 2002.

For the nine-month period ended September 30, 2003, net cash flows used by investing activities was $1,625 compared to $101,500 of net cash flows used by investing activities for the nine-month period ended September 30, 2002, which relates to the purchase of equipment.

Net cash flows provided by financing activities was $135,939 for the nine-month period ended September 30, 2003 compared to net cash flows provided by financing activities of $178,073 for the nine-month period ended September 30, 2002. The decrease during the nine-month period ended September 30, 2003 was primarily attributable to less cash proceeds from debt and stock.

MATERIAL COMMITMENTS

Cranford Assignment Agreement

A significant and estimated material commitment for the Company for fiscal year 2003 is the amounts due and owing under an assignment agreement with Mr. Tony Cranford dated January 19, 2001 (the "Cranford Assignment Agreement"). Pursuant to the Cranford Assignment Agreement, Mr. Cranford assigned all of his right, title and interest in Bet the House, including his rights to the provisional patent application no. 60/240.091, to the Company. In accordance with the terms and provisions of the Cranford Assignment Agreement, the Company agreed to pay Mr. Cranford (i) for a period of six months a monthly royalty fee of $175.00 for each Bet the House game that the Company leases to a third party during the six month period; and (ii) an aggregate purchase price of either (a) an amount to be calculated by multiplying the average monthly gross revenues generated by the Company for each Bet the House game leased during the six month period by three, or (b) $30,000, whichever is greater. The terms of Cranford Assignment Agreement further provide that such aggregate purchase price may be paid by the Company to Mr. Cranford on a monthly basis or in one aggregate payment, with such aggregate purchase price to be paid in full no later than March 31, 2002.

As of the date of this Quarterly Report, Mr. Cranford has not received any payments from the Company. Management has not determined the manner of payment to be made to Mr. Cranford and may not make such determination until the Company is adequately funded and several Bet the House games have been successfully marketed and generating revenues.

Asset Purchase Agreement

A significant and estimated material commitment for the Company for fiscal year 2003 is the amount of $300,000 due and owing under the terms of an asset purchase agreement entered into with Summit International Group, Inc. dated May 1, 2001 (the "Asset Purchase Agreement"). Pursuant to the terms of the Asset Purchase Agreement, the Company agreed to pay the amount of $300,000, as evidenced by the execution of two promissory notes.

The first promissory note dated May 1, 2001 is in the amount of $80,000 and is payable to Michael Humecki (the "Humecki Promissory Note"). The terms of the Humecki Promissory Note require the Company to make payments as follows: (i) on the 15th of each month commencing June 15, 2001, the greater of either (a) 50% of gross revenues collected during the prior month from the lease or sale by the Company of any of the assets acquired by the Company pursuant to the Asset Purchase Agreement (including the Pro Shuffle) or (b) $2,000.00; (ii) on the 15th of the month after the receipt of 25% of aggregate gross funds raised by the Company at any time on or after May 1, 2001 pursuant to any private or public offering of its securities (but such 25% shall not be paid on the first $100,000 of funds so raised by the Company); and (iii) interest at the rate of 8% per annum commencing May 1, 2002 on any portion of the $80,000 outstanding on the first of each month payable monthly.

As of the date of this Quarterly Report, the Company has paid Humecki approximately $28,779 in principal pursuant to the terms of the Humecki Promissory Note.

The Company and Michael Humecki entered into a security agreement dated May 1, 2001 (the "Security Agreement") pursuant to which the Company agreed to grant to Mr. Humecki a security interest in certain property which includes, but not limited to, the following: (i) all items of personal property which were acquired by the Company from Summit; (ii) all deposit accounts; (iii) all receivables; (iv) all inventory; and (v) all equipment.

The second promissory note dated May 1, 2001 is in the amount of $220,000 and is payable to Summit International Group, Inc. (the "Summit Promissory Note"). The terms of the Summit Promissory Note require the Company to make payments to Summit after payment in full is made by the Company of the Humecki Promissory Note as follows: (i) on the 15th of each month commencing after the Humecki Promissory Note, the greater of either (a) 50% of gross revenues collected during the prior month from the lease or sale by the Company of any of the assets acquired by the Company pursuant to the Asset Purchase Agreement (including the Pro Shuffle) or (b) $2,000; (ii) on the 15th of the month after the receipt of 25% of aggregate gross funds raised by the Company at any time on or after May 1, 2001 pursuant to any private or public offering of its securities (but such 25% shall not be paid on the first $100,000 of funds so raised by the Company and not until after payment in full of the Humecki Promissory Note); and (iii) interest at the rate of 8% per annum commencing May 1, 2004 on any portion of the $220,000 outstanding on the first of each month payable monthly.

As of the date of this Quarterly Report, the Company has paid Summit an amount of $43,327 under the terms of the Summit Promissory Note.

Loans from Shareholders

A significant and estimated material commitment for the Company for fiscal year 2003 is the amount of $69,000 due and owing certain shareholders of the Company. Certain shareholders of the Company previously advanced an aggregate of $69,000 to the Company pursuant to notes payable. The terms of the notes payable provide that the notes are non-interest bearing, and may be converted into an undetermined number of shares of the Company's restricted common stock

PLAN OF OPERATION

Funding

As of the date of this Quarterly Report, the Company is engaged in an offering pursuant to which it intends to raise an aggregate of $2,500,000. In accordance with the terms and provisions of the Private Placement Memorandum, the Company will offer and sell 10,000 shares of Series A Convertible Preferred Stock at $250.00 per share. Each share of Series A Convertible Preferred Stock will be convertible into two hundred shares of restricted common stock at anytime. The securities will not be registered under the 1933 Securities Act and will therefore be offered pursuant to an exemption from registration provided by Section 4(2) and Regulation D, Rule 506, of the 1933 Securities Act. As of the date of this Quarterly Report, the Company has sold and issued 96 shares of Series A Convertible Preferred Stock to nineteen investors for aggregate proceeds of $24,000.

As of the date of this Quarterly Report, the Company is engaged in an offering pursuant to which it intends to raise an aggregate of $1,000,000.00. In accordance with the terms and provisions of the Private Placement Memorandum, the Company is offering and selling 2,222,222 shares of its restricted common stock at $0.45 per share. The securities are not registered under the 1933 Securities Act and are therefore being offered pursuant to an exemption from registration provided by Section 4(2) and Regulation D, Rule 506, of the Securities Act. As of the date of this Quarterly Report, the Company has received $89,100.00 in gross proceeds. The Company has issued 198,000 shares of its restricted common stock to six investors, none of which were accredited investors.

As of the date of this Quarterly Report, the Company is engaged in a Regulation S offering pursuant to which it intends to sell up to 5,000,000 shares of its restricted common stock to non-U.S. residents at a purchase price of twenty percent (20%) of the bid price per share as quoted on the OTC Bulletin Board on the date of sale execution. The securities are not registered under the Securities Act and are therefore being offered pursuant to an exemption from registration provided by Section 4(2) and Regulation S of the Securities Act. As of the date of this Quarterly Report, the Company has received $128,164 in gross proceeds and has issued approximately 912,540 shares of its restricted common stock to twenty investors.

Management intends to use net proceeds received from the offerings for the Company's capital requirements, which consist primarily of marketing, advertising and travel expenses and professional fees.

Based upon a twelve-month plan proposed by management, it is anticipated that the Company's operational work plan will require approximately $500,000 of financing designed to fund the general business operations. As of the date of this Quarterly Report, the Company does not have any material commitments other than those described above nor does management anticipate any further material commitments within the next twelve months. It is anticipated that any expenditures to be incurred by the Company will be operational. Management anticipates that a substantial portion of the initial budget of $500,000 for the twelve-month work plan, which includes such expenditures, will be funded pursuant to public or private offerings, including the private placement offering described above under Regulation D, Rule 506 and Regulation S, of its debt or equity securities and future advancements. The Company may not be able to raise such funds and, therefore, the successful marketing of its products may not be accomplished.

From the date of this Quarterly Report, management believes that the Company can satisfy its cash requirements for approximately the next six months based on its ability to obtain advances from certain investors and related parties. In the event the Company is unable to obtain advances from certain investors and related parties, management believes that the Company can satisfy its cash requirements for approximately the next three months from its liquid assets.

As of the date of this Quarterly Report, the Company has generated little revenue from operations, has a working capital deficit and a retained earnings deficit. Therefore, the Company has been deemed a "going concern" by its independent auditors, as noted in the financial statements attached hereto. There is substantial doubt that the Company will be able to retain its status as a "going concern", that is assumption of the continuity of operations of the Company in the absence of evidence to the contrary. Management believes that it can maintain its status as a "going concern" based on its ability to raise funds pursuant to future public and private offerings and to obtain advances and minimize operating expenses by not duplicating expenses or incurring needless expenses.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this Quarterly Report, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, under which the Company has (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

Forward-Looking Statements

The foregoing discussion, as well as the other sections of this Quarterly Report on Form 10-QSB, contains forward-looking statements that reflect the Company's current views with respect to future events and financial results. Forward-looking statements usually include the verbs "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "understands" and other verbs suggesting uncertainty. The Company reminds shareholders that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results to differ materially from the forward-looking statements. Potential factors that could affect forward-looking statements include, among other things, the Company's ability to identify, produce and complete film projects that are successful in the marketplace, to arrange financing, distribution and promotion for these projects on favorable terms in various markets and to attract and retain qualified personnel.