GZFX is an online DVD movie and video game rental business. The Company offers subscribers a Web-based alternative to store-based DVD and video game rentals. For the six months ended 06/30/05, sales totaled $406K up from $58K. Net loss decreased 65% to $1.7M. Results reflect the change in business focus from consulting services to DVD and video game rentals. Lower loss reflects decreased advertising costs and lower consultancy fees.
Slow & Steady Approaching high.
-------------------- Greedy Because I'm Broke!!
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I think alot of traders like to bail out of a stock before a 10Q is released. Fear of the unknown. Now that the 10q will be released at a later date the buyers are coming back in.
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By Edgar Online - (EDG = 10Q, 10K) Last Update: 11/15/2005 1:13:13 PM Data provided by
(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management's discussion and analysis of financial condition and results of operations is based upon, and should be read in conjunction with, its unaudited financial statements and related notes included elsewhere in this Form 10-QSB, which have been prepared in accordance with accounting principles generally accepted in the United States.
Overview.
The Company, through its website www.gameznflix.com, is an online DVD movie and video game rental business dedicated to providing subscribers a quality rental experience. We offer subscribers a reliable, web-based alternative to traditional store-based DVD and video game rentals on a national scale. Our standard subscription plan of $16.99 per month allows subscribers to have up to three DVD and video game titles out at the same time with no due dates, late fees or shipping charges. Subscribers select titles at our website which are then sent via U.S mail with a prepaid return mailer. Our service is an alternative to store- based video game rentals as we offer a high level of customer service, quality titles, and superior product availability.
In March 2004, we launched our website, http://www.gameznflix.com, however, did not fully commence our operations in the online DVD and video game rental until September 2004. In conjunction with the website launch, we also launched a national television ad campaign designed to create awareness among our target consumers and to generate traffic to the website.
We believe that our planned growth and profitability will depend in large part on our ability to promote our services, gain subscribers and expand our relationship with current subscribers. Accordingly, we intend to focus our attention and investment of resources in marketing, strategic partnerships and development of our subscriber base. If we are not successful in promoting our services and expanding our subscriber base, this may have a material adverse effect on our financial condition and the ability to continue to operate the business.
Results of Operations.
Since our DVD and video game rentals operations did not fully commence until late fiscal year 2004, which is our business focus, discussions regarding comparative results between the three months March 31, 2005 compared to March 31, 2004 may not always be meaningful. Accordingly, discussions related to revenue and cost of revenue will be limited to the current period.
(a) Revenues.
The Company reported gross revenues of $130,607 and $536,362 for the three and nine months ended September 30, 2005, respectively. During the three and nine months ended September 30, 2005, our subscriber base averaged approximately 3,000 subscribers per month. We continue to focus on growing our subscriber base through marketing and affiliate partnership programs whereby a referral fee is paid for each new subscriber signed. Since our DVD and video games rental activities have a limited history, we are unable to provide any meaningful churn figures. Churn is a monthly measure defined as customer cancellations in the quarter derived by the sum of beginning subscribers and gross subscriber additions, then divided by three months. Customer cancellations in the quarter include cancellations from gross subscriber additions, which is included in the gross subscriber additions in the denominator. Once we have more operational activity history, management will use churn as a measure to evaluate whether we are obtaining new subscribers while retaining our existing subscribers in accordance to our business plans.
(b) Cost of Revenues.
The Company reported cost of revenues of $73,952 and $353,495 for the three and nine months ended September 30, 2005, respectively. The cost of revenues primarily were attributable to fulfillment expenses and mail delivery. We anticipate these two expenses to continue to comprise a significant portion of our overall cost of revenues. In March 2005, the Company changed its fulfillment services from an external provider to internally providing such services. We believe such change has significantly reduced the overall percentage of fulfillment expense in relation to gross revenues by approximately 60% and bettered overall fulfillment services to our customer. However, the current decrease in fulfillment expenses compared to gross revenues on an overall percentage basis will decrease in the future as we add personnel based upon growth of our subscriber base.
(c) Selling, General and Administrative Expenses.
The Company reported selling, general and administrative expenses of $512,721 and $1,073,968 for the three and nine months ended September 30, 2005, respectively, compared to $223,710 and $719,554 for the same periods in prior year, respectively, increases of $289,011 and $354,414 or approximately 129% and 49%, respectively. Selling, general and administrative expenses comprised primarily of related payroll expenses of approximately $671,000. We believe that the current level of selling, general and administrative expenses will tend to fluctuate by about 20% in the next twelve months from current levels.
(d) Amortization and Depreciation Expenses.
The Company reported amortization and depreciation expenses of $233,520 and $664,475 for the three and nine months ended September 30, 2005, respectively, compared to $46,237 and $66,171 for the same periods in prior year, respectively, increases of $187,283 and $598,304 or approximately 405% and 904%, respectively. Amortization and depreciation expenses were comprised mainly of amortization related to our DVD and game library that is being amortized over a twelve-month period upon any new purchases towards such library. As our overall DVD and game library increases in future periods, such increase will have a direct impact to our amortization and depreciation expense.
(e) Consulting and Professional Fees.
The Company reported consulting and professional fees of $454,122 and $1,059,005 for the three and nine months ended September 30, 2005, respectively, compared to $2,586,141 and $5,126,858 for the same periods in prior year, respectively, decreases of $1,837,127 and $4,067,853 or approximately 71% and 79%, respectively. Consulting and professional fees in 2004 were primarily related to hiring of business consultants to develop our business model for the launching of the DVD and video game rental business that approximate 88% of overall consulting and professional fees. Accordingly, we will continue to incur consulting and professional fees but not at such levels as in prior periods. We believe that the current level of consulting and professional fees will tend to fluctuate by about 25% in next twelve months based upon current levels.
(f) Net Loss.
The Company reported net losses of $1,223,535 and $2,884,234 for the three and nine months ended September 30, 2005, respectively, as result of the foregoing factors mentioned above. We anticipate having a recurring net loss for the remainder of 2005.
Factors That May Affect Operating Results.
The operating results of the Company can vary significantly depending upon a number of factors, many of which are outside its control. General factors that may affect the Company's operating results include:
- market acceptance of and changes in demand for services;
- a small number of customers account for, and may in future periods account for, substantial portions of the Company's revenue, and revenue could decline because of delays of customer orders or the failure to retain customers;
- gain or loss of clients or strategic relationships;
- announcement or introduction of new services by the Company or by its competitors;
- price competition;
- the ability to upgrade and develop systems and infrastructure to accommodate growth;
- the ability to introduce and market services in accordance with market demand;
- changes in governmental regulation; and
- reduction in or delay of capital spending by clients due to the effects of terrorism, war and political instability.
The Company believes that its planned growth and profitability will depend in large part on the ability to promote its services, gain clients and expand its relationship with current clients.
The Company is also subject to the following specific factors that may affect our operations:
(a) Ability to Attract and Retain Subscribers.
The Company must continue to attract and retain subscribers. To succeed, we must continue to attract subscribers who have traditionally used video and game retailers, video and game rental outlets, cable channels, such as HBO and Showtime and pay-per-view. The Company's ability to attract and retain subscribers will depend in part on its ability to consistently provide its subscribers a high quality experience for selecting, viewing or playing, receiving and returning titles. If consumers do not perceive the service offering to be of quality, or if the Company introduces new services that are not favorably received by them, we may not be able to attract or retain subscribers. If the efforts to satisfy its existing subscribers are not successful, we may not be able to attract new subscribers, and as a result, revenues will be affected adversely.
The Company must minimize the rate of loss of existing subscribers while adding new subscribers. Subscribers cancel their subscription to our service for many reasons, including a perception that they do not use the service sufficiently, delivery takes too long, the service is a poor value and customer service issues are not satisfactorily resolved. The Company must continually add new subscribers both to replace subscribers who cancel and to grow the business beyond the current subscriber base. If too many of subscribers cancel the Company's service, or if the Company is unable to attract new subscribers in numbers sufficient to grow the business, operating results will be adversely affected. Further, if excessive numbers of subscribers cancel the service, we may be required to incur significantly higher marketing expenditures than currently anticipated to replace these subscribers with new subscribers.
Subscribers to the service can view as many titles and/or play games as they want every month and, depending on the service plan, may have out between three and eight titles at a time. With the Company's use of three shipping centers and the associated software and procedural upgrades, we have reduced the transit time of DVD's and games. As a result, our subscribers have been able to exchange more titles each month, which has increased operating costs. As the Company established additional planned shipping centers or further refines its distribution process, it may see a continued increase in usage by subscribers. If subscriber retention does not increase or operating margins do not improve to an extent necessary to offset the effect of increased operating costs, operating results will be adversely affected.
Subscriber demand for titles may increase for a variety of other reasons beyond the Company's control, including promotion by studios and seasonal variations in movie watching. Subscriber growth and retention may be affected adversely if the Company attempts to increase monthly subscription fees to offset any increased costs of acquiring or delivering titles and games.
The Company may not be able to continue to support the marketing of its service by current means if such activities are no longer available or are adverse to its business. In addition, the Company may be foreclosed from certain channels due to competitive reasons. If companies that currently promote the Company's service decide to enter its business or a similar business, we may no longer be given access to such channels. If the available marketing channels are curtailed, the ability to attract new subscribers may be affected adversely.
The GameZnFlix brand is young, and the Company must continue to build strong brand identity. To succeed, we must continue to attract and retain a number of owners of DVD and video game players who have traditionally relied on store-based rental outlets and persuade them to subscribe to its service through its website. The Company may be required to incur significantly higher advertising and promotional expenditures than currently anticipated to attract numbers of new subscribers. The Company believes that the importance of brand loyalty will increase with a proliferation of DVD and game subscription services and other means of distributing titles. If our efforts to promote and maintain its brand are not successful, our operating results and ability to attract and retain subscribers will be affected adversely.
(b) Selection of Certain Titles by Subscribers.
Certain titles cost the Company more to purchase depending on the source from whom they are purchased and the terms on which they are purchased. If subscribers select these titles more often on a proportional basis compared to all titles selected, DVD or game acquisition expenses could increase, and gross margins could be adversely affected.
(c) Mix of Acquisition Sources May Affect Subscriber Levels.
The Company utilizes a mix of incentive-based and fixed-cost marketing programs to promote its service to potential new subscribers. We obtain a portion of its new subscribers through online marketing efforts, including third party banner ads, direct links and an active affiliate program. While the Company opportunistically adjusts its mix of incentive-based and fixed-cost marketing programs, it attempts to manage the marketing expenses to come within a prescribed range of acquisition cost per subscriber. To date, the Company has been able to manage its acquisition cost per subscriber; however, if we are unable to maintain or replace sources of subscribers with similarly effective sources, or if the cost of existing sources increases, subscriber levels may be affected adversely and the cost of marketing may increase.
(d) Competition.
The market for on-line rental of DVD's and games is competitive and the Company expects competition to continue to increase. In addition, the companies with whom we have relationships could develop products or services, which compete with the Company's products or services. Also, some competitors in our market have longer operating histories, significantly greater financial, technical, marketing and other resources, and greater brand recognition than we do. The Company also expects to face additional competition as other established and emerging companies enter the market for on-line rentals. To be competitive, we believe that we must, among other things, invest resources in developing new products, improving its current products and maintaining customer satisfaction. Such investment will increase the Company's expenses and affect its profitability. In addition, if it fails to make this investment, the Company may not be able to compete successfully with its competitors, which could have a material adverse effect on its revenue and future profitability.
(e) Potential Delivery Issues Could Result in the Loss of Subscribers.
The Company relies exclusively on the U.S. Postal Service to deliver DVD's and games from its shipping centers and to return DVD's and games from subscribers. We are subject to risks associated with using the public mail system to meet its shipping needs, including delays caused by bioterrorism, potential labor activism, and inclement weather. The Company's DVD's and games are also subject to risks of breakage during delivery and handling by the U.S. Postal Service. The risk of breakage is also impacted by the materials and methods used to replicate DVD's and games. If the entities replicating DVD's and games use materials and methods more likely to break during delivery and handling, or the Company fails to timely deliver DVD's and games to subscribers, subscribers could become dissatisfied and cancel the service, which could adversely affect operating results. In addition, increased breakage rates for DVD's and games will increase the Company's cost of purchasing titles.
(f) Limitations on Liability and Indemnification.
The Company's bylaws include provisions to the effect that we may indemnify any director, officer, or employee. In addition, provisions of Nevada law provide for such indemnification, as well as for a limitation of liability of our directors and officers for monetary damages arising from a breach of their fiduciary duties. Any limitation on the liability of any director or officer, or indemnification of any director, officer, or employee, could result in substantial expenditures being made by the Company in covering any liability of such persons or in indemnifying them.
(g) Adjustable Conversion Price Feature of Debentures Could Require the Issuance of Greater Number of Shares.
The Company's obligation to issue shares upon conversion of the convertible debentures to Golden Gate Investors, Inc. (see Liquidity and Capital Resources, below) is essentially limitless. The following is an example of the amount of shares of GameZnFlix common stock that are issuable upon conversion of the convertible debentures (excluding accrued interest), based on market prices 25%, 50% and 75% below the market price as of November 10, 2005 of approximately $0.01:
As illustrated, the number of shares of common stock issuable upon conversion of the convertible debentures will increase if the market price of the stock declines, which will cause dilution to the existing stockholders.
(h) Adjustable Conversion Price Feature of Debentures May Encourage Short Sales.
The convertible debentures issued to Golden Gate Investors, Inc. are convertible into shares of Company common stock at an 18% discount to the trading price of the common stock prior to the conversion. The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. The selling stockholder could sell common stock into the market in anticipation of covering the short sale by converting their securities, which could cause the further downward pressure on the stock price. In addition, not only the sale of shares issued upon conversion or exercise of debentures, warrants and options, but also the mere perception that these sales could occur, may adversely affect the market price of the common stock.
(i) Issuance of Shares upon Conversion of Debentures and Exercise of Warrants.
The issuance of shares upon conversion of the convertible debentures issued to Golden Gate Investors, Inc. and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholder may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholder may not convert their convertible debentures and/or exercise its warrants if such conversion or exercise would cause them to own more than 9.9% of Company outstanding common stock, this restriction does not prevent the selling stockholder from converting and/or exercising some of its holdings and then converting the rest of its holdings. In this way, the selling stockholder could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which may have the effect of further diluting the proportionate equity interest and voting power of holders of the common stock.
(j) If Stock Price Declines, the Company May Be Required to File A Subsequent Registration.
Based on the Company's current market price and the potential decrease in its market price as a result of the issuance of shares upon conversion of the convertible debentures issued to Golden Gate Investors, Inc., the Company has made a good faith estimate as to the amount of shares of common stock that it is required to register and allocate for conversion of the convertible debentures. In the event that the Company's stock price decreases, the shares of common stock the company has allocated for conversion of the convertible debentures and are registering hereunder may not be adequate. If our shares allocated to the registration statement are not adequate and the company is required to file an additional registration statement, we may incur substantial costs in connection with the preparation and filing of such registration statement.
(k) Repayment of Debentures, If Required, Would Deplete Available Capital.
The convertible debentures issued to Golden Gate Investors, Inc, are due and payable, with 4 3/4% interest, three years from the date of issuance, unless sooner converted into shares of common stock. In addition, any event of default could require the early repayment of the convertible debentures at a price equal to 125% of the amount due under the debentures. The Company anticipates that the full amount of the convertible debentures, together with accrued interest, will be converted into shares of its common stock, in accordance with the terms of the convertible debentures. If the Company were required to repay the convertible debentures, we would be required to use limited working capital and/or raise additional funds. If the Company were unable to repay the debentures when required, the debenture holders could commence legal action against the Company and foreclose on assets to recover the amounts due. Any such action may require the Company to curtail or cease operations.
Operating Activities.
The net cash used in operating activities was $1,500,657 for the nine months ended September 30, 2005 compared to $2,068,793 for the same period in prior year, a decrease of $568,136 or approximately 28%. This decrease is attributed to many changes from period to period, including the payment of stock based compensation.
Investing Activities.
Net cash used in investing activities was $787,256 for the nine months ended September 30, 2005 as compared to $318,590 for the same period in prior year, an increase of $468,666 or approximately 147%. This increase resulted from increased purchases of DVD and games inventory.
Liquidity and Capital Resources.
As of September 30, 2005, the Company had total current assets of $480,497 and total current liabilities of $1,481,701, resulting in a working capital deficit of $1,001,204; as of that date, the Company had cash of $38,870. During the nine months ended September 30, 2005 and 2004, the Company incurred losses of $2,884,234 and $7,945,385, respectively, and the Company has an accumulated deficit of $21,387,368 as of September 30, 2005. These factors raise substantial doubt as to the Company's ability to continue as a going concern. The Company's independent accountants' audit report included in the Form 10-KSB for the year ended December 31, 2004 includes a substantial doubt paragraph regarding the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared assuming that the Company continues as a going concern that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business assuming the Company will continue as a going concern. However, the ability of the Company to continue as a going concern on a longer-term basis will be dependent upon its ability to generate sufficient cash flow from operations to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately attain profitability.
Our current cash flow from operations will not be sufficient to maintain our capital requirements for the next twelve months. Accordingly, we will need to continue raising capital through either debt or equity instruments. We believe we will need to raise at least $5,000,000 within the next twelve months so we may continue executing our business plans. Whereas the Company has been successful in the past in raising capital, no assurance can be given that these sources of financing will continue to be available to us and/or that demand for our equity/debt instruments will be sufficient to meet its capital needs, or that financing will be available on terms favorable to the Company. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
If funding is insufficient at any time in the future, we may not be able to take advantage of business opportunities or respond to competitive pressures, or may be required to reduce the scope of our planned product development and marketing efforts, any of which could have a negative impact on its business and operating results. In addition, insufficient funding may have a material adverse effect on our financial condition, which could require us to:
- curtail operations significantly;
- sell significant assets;
- seek arrangements with strategic partners or other parties that may require the Company to relinquish significant rights to products, technologies or markets; or
- explore other strategic alternatives including a merger or sale of the Company.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. Regardless of whether our cash assets prove to be inadequate to meet our operational needs, we may seek to compensate providers of services by issuance of stock in lieu of cash, which may also result in dilution to existing shareholders.
The Company has been successful in obtaining the required cash resources through private placements, convertible debentures and notes payable to service the Company through to the end of 2005 (through September 30, 2005, the Company has realized $1,968,962 from the through the sales of common stock and the issuance of common stock in connection with options exercised). In addition, the Company entered into a Securities Purchase Agreement with Golden Gate Investors, Inc. on November 11, 2004 for the sale of (i) $150,000 in convertible debentures and (ii) warrants to buy 15,000,000 shares of our common stock (see Exhibits 4.20 to 4.24). This summary relates to the resale of the common stock underlying these convertible debentures and warrants. The investor provided us with an aggregate of $150,000 as follows:
- $100,000 was disbursed to us on November 11, 2004; and;
- $50,000 has been retained for services provided to our Company by various professionals, which were disbursed upon effectiveness of the Form SB-2 registration statement.
The debentures bear interest at 4 3/4%, mature three years from the date of issuance, and are convertible into our common stock, at the selling stockholder's option. The convertible debentures are convertible into the number of our shares of common stock equal to the principal amount of the debentures being converted multiplied by 110, less the product of the conversion price multiplied by 100 times the dollar amount of the debenture. The conversion price for the convertible debentures is the lesser of (i) $0.20, (ii) 82% of the average of the three lowest volume weighted average prices during the twenty trading days prior to the conversion or (iii) 82% of the volume weighted average price on the trading day prior to the conversion. Accordingly, there is in fact no limit on the number of shares into . . .
Nov 15, 2005
-------------------- We are in it to win, why not win togather.
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Revenues up. Gross profit up. Operating expenses down. Net loss down. OS 1.028 billion (not near as high as some estimates). Pretty good considering this doesnt even include whats going to happen to revs with Circuit City parnership.
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Exactly Smoky, nice balance of things, just what most of us knew was coming not that much change from the last qrt. Which is great now we can move forward and get ready to expand and open up bigger gross profits, and revenues now that we have CC on our team. Which looks to be a long term relationship starting to form.
Just a real laid back filing in my book, still looking over some of it. Pretty long.
-------------------- We are in it to win, why not win togather.
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imakmony2005
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Well surfed and not to much changed, time to read.
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quote:Originally posted by smoky: Revenues up. Gross profit up. Operating expenses down. Net loss down. OS 1.028 billion (not near as high as some estimates). Pretty good considering this doesnt even include whats going to happen to revs with Circuit City parnership.
& PPS on the rise....
-------------------- Greedy Because I'm Broke!!
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quote:Originally posted by pennnies: lol looks like most are reading. Once they are done the buys should start. This Quarterly is good news!
I read nothing good here. please explain what you mean.
Ok, I have only just finished a really cursory reading but...
Basically, what is good is that things were improving up to Sep 30th. They were still showing a loss, but it was about half of the loss from last year in the same time frame. They are cutting costs, and increasing revenue.
So, while not in the black, they were trending in the right direction. Now if you add in the recent events with Circuit City and the growth potential from here, all of that streamlining should pay off and bring us to break even and eventually profitability even sooner.
-------------------- I just want to make enough money to be eccentric.
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quote:Originally posted by pennnies: lol looks like most are reading. Once they are done the buys should start. This Quarterly is good news!
I read nothing good here. please explain what you mean.
Ok, I have only just finished a really cursory reading but...
Basically, what is good is that things were improving up to Sep 30th. They were still showing a loss, but it was about half of the loss from last year in the same time frame. They are cutting costs, and increasing revenue.
So, while not in the black, they were trending in the right direction. Now if you add in the recent events with Circuit City and the growth potential from here, all of that streamlining should pay off and bring us to break even and eventually profitability even sooner.
Thank you for your polite reply. I will be watching more closely now!. thanks again! GLTA.
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