-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LmVODfI4jI9QsrcyWCZUHypC6P/c832SXhNxrkqaJyM4dkyfUoXUnNeCbGO7ZRm2 EQ7SnOJEAEy2Uy6ia3862A== 0001263279-04-000420.txt : 20041214 0001263279-04-000420.hdr.sgml : 20041214 20041214154846 ACCESSION NUMBER: 0001263279-04-000420 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041031 FILED AS OF DATE: 20041214 DATE AS OF CHANGE: 20041214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GWIN INC CENTRAL INDEX KEY: 0000924396 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 043021770 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24520 FILM NUMBER: 041201535 BUSINESS ADDRESS: STREET 1: 5092 S JONES BLVD CITY: LAS VEGAS STATE: NV ZIP: 89118 BUSINESS PHONE: 9786892080 MAIL ADDRESS: STREET 1: 5092 S JONES BLVD CITY: LAS VEGAS STATE: NV ZIP: 89118 FORMER COMPANY: FORMER CONFORMED NAME: GLOBAL SPORTS & ENTERTAINMENT INC/ DATE OF NAME CHANGE: 20011119 FORMER COMPANY: FORMER CONFORMED NAME: IMSCO TECHNOLOGIES INC /DE/ DATE OF NAME CHANGE: 20010802 FORMER COMPANY: FORMER CONFORMED NAME: IMSCO INC /MA/ DATE OF NAME CHANGE: 19940602 10QSB 1 gwin.txt GWIN, INC. FORM 10-QSB DTD 10-31-2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 000-24520 GWIN, INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 04-3021770 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 5092 S. Jones Boulevard, Las Vegas, Nevada 89118 ------------------------------------------------ (Address of principal executive offices) (702) 967-6000 --------------------------- (Issuer's telephone number) N/A ------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 [ ] As of October 31, 2004 the Company had 87,665,496 shares of its $.0001 par value common stock issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] GWIN, Inc. Index to Form 10-QSB Page Part I - FINANCIAL INFORMATION ................................. 3 Item 1. Financial Statements .............................. 3 Consolidated Balance Sheet at October 31, 2004 (Unaudited) ............................................. 3 Consolidated Statements of Operations for the three months ended October 31, 2004 and 2003(Unaudited)...... 4 Consolidated Statements of Cash Flows for the three months ended October 31, 2004 and 2003 (Unaudited) ............................................ 5 Notes to Financial Statements .......................... 7 Item 2. Management's Discussion and Analysis or Plan of Operation .............................................. 11 Item 3. Internal Controls ................................. 17 Part II - OTHER INFORMATION .................................... 17 Item 1. Legal Proceedings ................................. 17 Item 2. Change in Securities and Use of Proceeds .......... 17 Item 3. Defaults Upon Senior Securities ................... 17 Item 4. Submission of Matters to a Vote of Securities Holders ................................................... 17 Item 5. Other Information ................................. 17 Item 6. Exhibits and Reports on Form 8-K .................. 18 SIGNATURES ..................................................... 19 2 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS GWIN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS October 31, 2004 ------------ Current assets: Accounts Receivable $ 310,186 Prepaid Expenses 174,120 ------------ Total current assets 484,306 ------------ Property & equipment (net) 100,036 Equipment held under capital leases (net) 5,224 Deposits & other assets 502,904 ------------ Total assets $ 1,092,470 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Cash overdrafts $ 109,138 Current portion of long-term debt 627,132 Accounts payable - related parties 144,142 Notes payable - related parties 229,528 Deferred revenue 793,000 Accounts payable 477,588 ------------ Total current liabilities $ 2,380,528 ------------ Long term debt, less unamortized discount of $50,382 227,151 ------------ Total liabilities $ 2,607,679 ------------ Stockholders' deficit: Preferred stock - $0.0001 par value; 5,000,000 shares authorized; 0 shares issued & outstanding 0 Common stock - $0.0001 par value; 150,000,000 shares authorized; 87,665,496 shares issued & outstanding 8,770 Additional paid in capital 25,070,430 Accumulated deficit (26,542,741) Prepaid Expenses - Related parties (51,667) ------------ Total stockholders' deficit (1,515,209) ------------ Total liabilities and stockholders' deficit $ 1,092,470 ============ The accompanying notes are an integral part of these consolidated financial statements. 3 GWIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months ended October 31, 2004 2003 ------------ ------------ Net revenue services $ 862,925 $ 1,845,379 Revenues advertising 298,550 461,608 ------------ ------------ Total revenues 1,161,475 2,306,987 ------------ ------------ Handicapping fees 52,659 99,215 Handicapping fees related party 102,743 114,438 Advertising expense 773,045 1,057,838 Commissions 398,223 645,061 Salaries & wages 284,436 315,016 Professional fees 14,039 45,669 General & administrative 298,282 411,819 Depreciation expense 15,236 11,984 ------------ ------------ Total operating expense 1,938,662 2,701,040 Operating (loss) (777,187) (394,053) Interest (expense), including amortization of debt discount (23,403) (97,586) Other non-cash costs of financing (33,750) (50,000) Interest (expense) related parties (7,322) (48,819) ------------ ------------ Net (loss) $ (841,662) $ (590,458) ============ ============ Basic and diluted (loss) per share of common stock $ (0.01) $ (0.01) Basic and diluted weighted shares of common stock outstanding 84,700,523 54,605,313 The accompanying notes are an integral part of these consolidated financial statements. 4 GWIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended October 31, 2004 2003 ------------ ------------ Cash flows - operating activities: Net (loss) $ (841,662) $ (590,458) Adjustments to reconcile net (loss) to net cash used in operations: Depreciation 15,236 11,984 Services & settlements paid with common stock and warrants 0 50,000 Amortization of Prepaid Expenses - Related Parties 15,000 0 Interest expense - amortization of debt discount 12,184 99,708 Decrease (increase) in: Accounts receivable (272,693) (141,308) Prepaid expenses (145,234) (56,490) Other assets (180,727) (16,367) Increase (decrease) in: Deferred revenue 480,809 298,581 Accounts payable 32,374 45,624 Accounts payable - related parties 107,322 (42,278) Other current liabilities 10,041 (87,762) ------------ ------------ Total adjustments 74,313 161,692 ------------ ------------ Total cash (used in) operating activities (767,350) (428,766) ------------ ------------ Cash flows - investing activities: Purchase of property and equipment (8,848) (29,048) ------------ ------------ Total cash (used in) investing activities (8,848) (29,048) ------------ ------------ Cash flows - financing activities: Cash Overdrafts 109,138 0 Proceeds from issuance of notes payable - related parties 0 925,559 Payments on long-term debt & lease obligations (2,408) (1,042,943) Proceeds from issuance of common stock 230,000 427,793 ------------ ------------ Total cash provided by financing activities 336,730 310,409 ------------ ------------ Net (decrease) in cash (439,468) (147,405) Cash - beginning of the periods 439,468 420,814 ------------ ------------ Cash - end of the periods $ 0 $ 273,409 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 5 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES For the three months ended October 31, 2004 and 2003, the Company paid $0 for taxes and $ 11,371 for interest and $0 for taxes and $24,722 for interest, respectively. The Company issued stock and warrants in payment for professional services and settlement costs; For the three months ended October 31, 2004 and 2003, the Company issued 0 and 200,000 share of common stock, respectively for such services. For the three months ended October 31, 2004 and 2003, the Company also issued shares in repayment of debt; The Company issued 1,500,000 and 4,697,272 such shares as repayment for $110,000 and $925,559 of interest and principal, respectively. 6 GWIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - Organization and Operations GWIN, Inc., and subsidiaries, (the "Company") is headquartered in Las Vegas, Nevada. The Company primarily develops, produces and markets sports handicapping analysis and information via television, radio and the Internet. The Company is engaged in a highly seasonal business, with the majority of sales related to football and basketball handicapping. Due to this seasonality, quarterly results may vary materially between the football and basketball seasons, concentrated in the first and the second quarter of the Company's fiscal year, and the remainder of the year. NOTE 2 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the interim financial statements not misleading have been included. Results for the interim periods are not necessarily indicative of the results that may be expected for the fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended July 31, 2004. The results of the three months ended October 31, 2004 are not necessarily indicative of the results to be expected for the full year ending July 31, 2005. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiary, Global SportsEDGE, as well as several inactive subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. Earnings (Loss) Per Share - "Basic" earnings (loss) per share equals net income divided by weighted average common shares outstanding during the period. "Diluted" earnings per common share equals net income divided by the sum of weighted average common shares outstanding during the period plus common stock equivalents if dilutive. For the three months ended October 31, 2004 and 2003, the number of common stock equivalents excluded from the calculation was 18,436,691 and 21,872,350 respectively. Stock Options and Similar Equity Instruments - The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," for stock options and similar equity instruments (collectively "Options") issued to employees and directors; however, the Company will continue to apply the intrinsic value based method of accounting for options issued to employees 7 prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" rather than the fair value based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions in which an entity issues its equity instruments to acquire goods and services from non-employees. Those transactions must be accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. No options were granted during the periods ended October 31, 2004 or 2003. Revenue Recognition - Service and advertising contracts vary substantially in length from a single sporting event to entire seasons. The Company recognizes the revenue from service contracts ratably, over the estimated term of the underlying contracts. It is important to note that while revenue from service contracts is deferred and recognized only as the service is delivered, the bulk of the costs associated with generating that revenue including advertising, commissions, and handicapping fees are expensed in the quarter that the service contract is generated. Operating Costs & Expenses - Handicappers' fees and sales representatives' compensation and related expenses are charged to operations as incurred because the Company believes these costs have no future economic benefit. Convertible Debentures - In September, 2002, we entered into an agreement with Newmarket Investments, plc ("Newmarket"), an existing convertible debenture holder, which provided that Newmarket invest an additional $700,000 in the Company by amending the existing $500,000 convertible debenture held by Newmarket to reflect a principal amount of $1,200,000. In October 2003 through January 2004 Newmarket converted the entire $1,200,000 of the convertible debenture in exchange for 9,230,769 shares of common stock. The agreement with Newmarket also provided that Newmarket provide a standby credit facility for $250,000, bearing interest at 16% per annum. At October 31, 2004 the Company owes $155,515 in principle and interest on the note. The Company has convertible debentures outstanding as of October 31, 2004 totaling $694,000. The repayment schedule of such debt is as follows: $119,000 due January of 2005, $25,000 due January 2006, $250,000 due June 2005, and $300,000 due June 2005. All of the convertible debt outstanding has a mandatory conversion feature, and must be paid in common stock upon maturity. The Company has recorded these convertible debentures, net of associated discounts, as components of long-term debt on the balance sheet. Preferred Stock - At October 31, 2004 the Company had no Preferred Stock outstanding. 8 Common Stock During the three month period ended October 31, 2004 the Company issued common stock for cash and to repay debt. The Company issued 1,500,000 shares of common stock to a debt-holder of the Company; these shares were valued at a total of $110,000 which was the total amount of principal and interest which was paid by this issuance. The Company also issued 2,875,000 shares to investors; these shares were valued at $230,000, which was the cash received for these shares. NOTE 3 - Going Concern The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern and realization of assets and settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $841,662 for the three months ended October 31, 2004 and has an accumulated deficit of $26,542,741 at October 31, 2004. The Company believes that it will need additional financing and cash to fund projected increases in required credit card deposits. The Company has credit card deposits of approximately $485,000 currently (which is accounted for as deposits on the balance sheet) and management estimates that this number may increase to approximately $950,000. These deposits are earned funds that are held by the credit card processors under the processing agreements of Company. The required deposits change based upon the amount of transactions processed and the processors' estimation as to the risks related to the business. The entire amount of these deposits will be remitted to GWIN upon termination of the underlying credit card processor relationships. The Company also has current and non-current debt outstanding, for which it will be unable to pay from operations. These operating losses and operational requirements, as well as the uncertain sources of financing, create an uncertainty about the Company's ability to continue as a going concern. The Company will continue to seek additional infusion of capital from accredited investors and institutional lenders until the Company is operationally profitable. Subsequent to the end of the quarter being reported, the Company completed a Convertible Debt financing [Note 6] that management believes will provide the Company with capital it requires to fund its ongoing operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. NOTE 4 - Commitments Legal Matters - In the normal course of business, the Company is exposed to a number of asserted and unasserted potential claims. The Company is not currently a party to any legal proceedings either as a defendant or as a plaintiff. 9 NOTE 5 - Tax Expense The Company has not accrued Income Tax Expense for the periods ended October 31, 2004 and 2003 at its statutory rates due to unused net operating losses and acquired net operating losses. NOTE 6 Subsequent Events In November of 2004 the Company completed a $600,000 placement of convertible debt with Laurus Master Fund, LLC. The details of this transaction were disclosed in an 8-K filing with the Securities and Exchange Commission which was filed on December 1, 2004. The Company is using the funds raised for operational purposes. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated Balance Sheet as of October 31, 2004 (unaudited) and the unaudited Statements of Operations and Cash Flows for the three months ended October 31, 2004 and 2003, and the related notes thereto, as well as the audited financial statements of the Company included in the Company's annual report on Form 10- KSB for the year ended July 31, 2004 filed with the Securities and Exchange Commission on November 1, 2004. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you not to place undue reliance on any forward-looking statements, all of which speak only as of the date of this report. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission. One of the attractive aspects of our business is that we generate revenues from multiple sources. The two major sources are "Services Revenues", and "Advertising Revenues". "Service Revenues" are generated by selling the handicapping advice and analysis of our professional handicappers. Services Revenue is generated from respondents to our various media promotions including those promoted on our weekly 30-minute television program called "Wayne Allyn Root's WinningEDGE ", which, during the 2004 football season, has aired nationally on the Spike TV Network. We also produce an hour long radio program called The WinningEDGE that airs on selected radio stations nationwide. In addition to The WinningEDGE television and radio programs, we advertise our services on radio in various markets and in selected print media including the week-end edition of USA Today. During a football weekend we will receive as many as 10,000 to 15,000 phone calls in response to our offers. These calls are returned by our team of sports account representatives in our office in Las Vegas. The account representative offers the caller a variety of handicapping packages for the services of our handicappers. Our handicapping services are also offered and sold on our Web site, www.WinningEDGE.com. The Web site provides free live odds, scores, schedules, injury and weather reports and free picks from our professional handicappers, as well as the opportunity for visitors to purchase a broad selection of picks and services offered through the site. The second major source of revenue for the Company is "Advertising Revenues". Advertising Revenues are revenues generated from payments made to the Company from third party advertisers (sponsors) on our various television, radio, print, and Internet properties. They also include revenues generated from the rental of our customer databases to noncompetitive advertisers. The Company has built a telemarketing, direct mail, and email databases totaling over 200,000 potential clients who have 11 contacted us through our various media promotions. Although not recorded as an asset on the Company's Balance Sheet, the Company considers its databases to be extremely valuable assets both as a continuing lead source for our handicapping services and as an additional source of revenue from the rental of our customer lists. As described below, the value of this database was demonstrated when a major portion of it was hacked into and stolen last fall. The Company believes that this theft cost the Company approximately $2 million in revenues, and as discussed below, is a primary factor why Operating Revenues are lower in the first fiscal quarter of 2005 than they were in the first fiscal quarter of 2004. The Company took aggressive steps including hiring Robert Half & Associates and investing approximately $150,000 in improved firewalls and database security to prevent any further database losses. The Company believes that it is now well positioned to continue to rapidly grow both Service and Advertising Revenues. Total Revenues for the three months ended October 31, 2004 were $1,161,475 compared to Total Revenues for the three months ended October 31, 2003 which were $2,306,987. This decrease is a combination two primary factors: First, during the preceding year the Company was the victim of an Internet hacking theft of the Company's database and customer lists as disclosed in our quarterly report to the Securities and Exchange Commission for the period ended January 31, 2004. This theft caused a significant decline in sales to existing customers during the third and fourth quarters of the Company's fiscal year 2004. The decline was caused primarily by the stolen customer lists being sold to our competitors whose sales representatives convinced some clients to purchase their services rather than the Company's services, or who simply badgered the Company's clients to such an extent that they stopped purchasing handicapping services all together. Since the Company does not normally advertise for new customers during the third and fourth quarters of the fiscal year, the Company is reliant upon reselling its existing customers and potential clients already in its database until it begins its seasonal advertising program coinciding with the start of the professional football season. An additional factor is that the 2004-2005 professional football season began September 11, 2004 which is one week later than the prior year. Consequently, the amount of Service Revenues generated during the first two months of the first fiscal quarter (August through October) together with a lower than normal amount of deferred Service Revenue that was available to carry forward into the first fiscal quarter, resulted in the decline in reported revenues for the quarter. Due to the accounting requirement that sales only be recognized as Service Revenue during the quarter the services are provided, $793,000 has been recorded as a Deferred Revenue liability on the Balance Sheet and not as Operating Revenue for the Quarter. As an example, if, on October 1, a $4,000 sale is made for services for the remainder of the football season, then, since the football season runs through January 2005, only one fourth of that sale ($1,000 for the month of October) is recorded as first quarter income and the balance ($3,000 for November, December & January) is recorded as Deferred Revenue on the Balance Sheet. Most of the revenue deferred in the first quarter of the fiscal year will be recorded as Operating Revenue during the second fiscal quarter. 12 Even though a only portion of the sales made during the first fiscal quarter are recorded as Deferred Revenue and not as Operating Revenue during the Quarter, all costs associated with generating that sale are recorded as expenses for during the quarter in which they were incurred. The result of this accounting treatment is that during periods, such as the fiurst fiscal quarter with large increases in the amount of Deferred Revenue, reported Operating Revenues will be lower than actual sales while expenses are fully accounted for, thus reducing reported Operating Profits for the quarter. The decline in Advertising Revenue for the quarter is also related to the accounting treatment of advertising sales. The Company made the strategic decision to seek sponsors that would advertise with the Company on a year- round basis rather than only during the heavy fall promotional period. While this decision has negatively impacted this quarter, it will allow for a more evenly reported revenue stream throughout the balance of the year. Insofar as the Company has received pre-payments for these advertising services, they are recorded as Deferred Revenues. Several things are important to note: (i) Most of the Deferred Revenue from the first fiscal quarter will be captured as increased Operating Revenue for the Quarter ending January 31, 2005. Since essentially all the costs associated with generating these Deferred Revenues was recorded as expense in the quarter ended October 31, 2004, this higher Deferred Revenue can be expected to make a substantial contribution to Operating Revenue and Operating Profit for the second quarter which ends January 31, 2005; (ii) Total gross sales during the month of November and continuing into December, just prior to releasing this report, exceeded gross sales in the comparable period last year, demonstrating that the negative effects of the theft of the database is now behind us and is not expected to be a factor in the future; (iii) The Company retained Robert Half and Associates, a leading technology consulting firm, to review and improve our firewalls and database security. Approximately $150,000 was spent on this task and the task is now complete. This amount was expensed as incurred. CRITICAL ACCOUNTING POLICIES In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant effect on our revenues and net income or net loss, as well as on the value of certain assets on our balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance as these policies affect the reported amounts of revenues, expenses, and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our financial statements, two areas of particular significance are identified. One of theses areas is the deferral estimate applied to revenues and the other area is the pricing of options and warrants issued by the Company. In addition, please refer to Note 1 to the accompanying consolidated financial statements for further discussion of our accounting policies. Our service contracts with clients vary substantially in length from a single sporting event to entire seasons. We recognize the revenue from service contracts ratably, over the estimated term of the underlying service 13 contract. It is important to note that while revenue from service contracts is deferred and recognized as the service is delivered, the bulk of the costs associated with generating that revenue including advertising, commissions, and handicapping fees are expensed in the quarter that the service contract is generated. In the past two years, we have issued substantial amounts of warrants and options to purchase common stock in connection with financing activities and as payment for services and other items. We record the cost attributable to those issuances on the basis of the Black-Scholes option valuation model. The use of this model requires some highly subjective assumptions including expected stock price volatility. COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 2004 TO THE THREE MONTHS ENDED OCTOBER 31, 2003 REVENUES. Net Service Revenues from sports handicapping services (after charge-backs and changes in Deferred Revenue) decreased from $1,845,379 for the three months ended October 31, 2003 to $862,925 for the same period in 2004, a decrease of 53%. This decrease was primarily the result of a theft of the Company's database and client list in the preceding year causing Deferred Revenue going into the first quarter to decrease and lower sales until a new database of client leads could be generated from the Company's promotional activities, which generally began approximately midway through the quarter. Management believes that the financial impact of the theft has now been absorbed. As proof of the rebound in Service sales, for the month of November 2004 the Company had its second best sales month in its history with November 2004 service sales exceeding those of November 2003. Advertising Revenue decreased from $461,608 for the three months ended October 31, 2003 to $298,550 for the same period in 2004, a decrease of 35%. This decrease is primarily a result of the Company's decision to write advertising contracts with our sponsors for a full year instead of only advertising for the football season. The Company feels this will allow sponsors to benefit from advertising year round on the Internet as well as in the fall on the television and radio programs. This has caused a negative impact on first quarter revenues, but the Company will benefit by having Advertising Revenues more evenly distributed during the remainder of the fiscal year. OPERATING COSTS AND EXPENSES. Total operating costs and expenses were $1,938,662 for the three months ended October 31, 2004 compared to $2,701,040 for the same period in 2003, a decrease of 29%. A detailed breakdown of those costs and expenses follows: Handicapping fees decreased from $213,653 for the three months ended October 31, 2003 to $155,402 for the same period in 2004, a decrease of 27%. These fees are based upon a percentage of revenues before changes in Deferred Revenue and the total amount in 2004 is consistent with the appropriate relationship to revenues and our agreements with our handicappers. Advertising Expenses, including production costs, decreased from $1,057,838 for the three months ended October 31, 2003 to $773,045 for the same period in 2004. This 26% decrease is a direct result of better pricing for television and radio time due to having a branded show on national 14 television for 5 years, and using better point of sale software to quickly determine where the best return on leads is being generated. Commission Expense decreased from $645,061 for the three months ended October 31, 2003 to $398,223 for the same period in 2004, a decrease of 39%. Commissions are based upon a percentage of revenues before changes in Deferred Revenue and is lower due to lower sales in the three months ended October 31, 2004. Salaries and Wages decreased from $315,016 for the three months ended October 31, 2003 to $284,436 for the same period in 2004, a decrease of 9%. This is primarily the result of better pricing on health care insurance due to changing carriers. Professional Fees decreased from $45,669 for the three months ended October 31, 2003 to $14,039 for the same period in 2004, a 65% decrease. The decrease is primarily due to lower legal expenses during the three months ended October 31, 2004. General and Administrative Expenses decreased from $411,819 for the three months ended October 31, 2003 to $298,282 for the same period in 2004, a decrease of 27%. This decrease is primarily a result of a decrease in credit card processing fees due to lower sales and better pricing on telephone rates. Seasonality Our business is highly seasonal. Because football and basketball are the most popular sports for wagering, the demand for the handicapping analysis and selections for these sports is substantially higher than for other sporting events. As a result, approximately 70% of our sales occur in the first and second quarters of the Fiscal Year. Because of these factors, our quarterly operating results are difficult to predict and are likely to vary in the future. We have traditionally experienced higher net sales in the first and second quarters of the Fiscal Year and lower net sales in the third and fourth quarters of the Fiscal Year. We expect this seasonality to continue for the foreseeable future. If we are ultimately successful in pursuing our strategy to expand our handicapping services to cover other sports that are popular internationally, such as soccer and cricket, we may reduce the seasonality of our business. However, there can be no assurance that future seasonal fluctuations will not adversely affect the business or results of operations. LIQUIDITY AND CAPITAL RESOURCES Our working capital deficit as of October 31, 2004, was $1,896,222 as compared to a working capital deficit of $1,243,175 as of July 31, 2004. Of the October 31, 2004 amount, approximately $793,000 represents revenues from sales which will not be recognized until after October 31, 2004. During the three months ended October 31, 2004, we raised approximately $230,000 from accredited investors. 15 In November, 2004 the Company completed a Convertible Debenture placement for $600,000 (see Subsequent Events Note). The Company believes that this additional financing and cash flow from operations will be sufficient to fund the Company's operating requirements. The Company may continue to seek additional infusions of capital. SUMMARY OF CASH FLOWS FOR THE THREE MONTHS ENDED OCTOBER 31,2004 GWIN's cash decreased approximately $548,606 during the three months ended October 31, 2004. The decrease was a result of the operating loss of $841,663, which was offset in part by the $230,000 in proceeds from the issuance of equity. OPERATING ACTIVITIES Net cash used in operating activities increased from $428,766 in the three months ended October 31, 2003 to $767,350 in the three months ended October 31, 2004. The primary reason was the increase in the net loss from $590,458 in the three months ended October 31, 2003 to $841,663 in the three months ended October 31, 2004 and an increase in deferred revenue. INVESTING ACTIVITIES Net cash used in investing activities decreased from $29,048 during the three months ended October 31, 2003 to $8,848 during the three months ended October 31, 2004 because fewer assets were purchased in the most recent three months. FINANCING ACTIVITIES Net cash provided by financing activities increased from $310,409 during the three months ended October 31, 2003 to $336,930 during the three months ended October 31, 2004. Included in the amount for the three months ended October 31, 2004, $230,000 was received from the sale of common stock and $109,138 was the result of bank overdrafts. FORWARD LOOKING STATEMENTS This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on our management's beliefs as well as assumptions and information currently available to us. When used in this report, the words "believe," "expect," "anticipate," "estimate" and similar expressions are intended to identify forward-looking statements. These statements are subject to risks, uncertainties and assumptions, including, without limitation, our present financial condition, the risks and uncertainties concerning the availability of additional capital as and when required, the risks and uncertainties concerning general economic conditions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you not to place undue reliance on any forward-looking 16 statements, all of which speak only as of the date of this report. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission. ITEM 3. INTERNAL CONTROLS The Company maintains disclosure controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended the ("Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the Evaluation Date. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. During the three months ended October 31, 2004, we sold 2,875,000 restricted shares of common stock at a price of $.08 per share to 2 persons living outside of the United States, in reliance on the exemption provided by Regulation S promulgated under the Securities Act of 1933, as amended. The shares were sold to investors introduced by a Netherlands investment banking firm which we paid a fee of 12% of the principal amount of the shares sold. The appropriate restrictive legend was placed on the certificates. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. ITEM 5. OTHER INFORMATION. Inapplicable 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. Exhibit No. Description Location 31.1 Certification of Chief Filed herewith Executive Officer Pursuant electronically to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Filed herewith Financial Officer Pursuant electronically to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Filed herewith Executive Officer Pursuant electronically to 18 U.S.C Section 1350 32.2 Certification of Chief Filed herewith Financial Officer Pursuant electronically to 18 U.S.C Section 1350 (b) Reports on Form 8-K. None. 18 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GWIN, Inc. (Registrant) Dated: December 10, 2004 By:/s/ Jeffrey Johnson Jeffrey Johnson Chief Financial Officer Dated: December 10, 2004 By:/s/ Wayne Allyn Root Wayne Allyn Root Chairman and Chief Executive Officer 19 EX-31 2 ex311.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Wayne Allyn Root, certify that: 1. I have reviewed this quarterly report of GWIN, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: December 10, 2004 /s/ Wayne Allyn Root Wayne Allyn Root Chief Executive Officer (Principal Executive Officer) EX-31 3 ex312.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffrey Johnson, certify that: 1. I have reviewed this quarterly report of GWIN, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: December 10, 2004 /s/ Jeffrey Johnson Jeffrey Johnson Chief Financial Officer (Principal Financial Officer) EX-32 4 ex321.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER GWIN, INC. PURSUANT TO 18 U.S.C. SECTION 1350 I hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-QSB of GWIN, Inc. for the period ending October 31, 2004: (1) complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of GWIN, Inc. /s/ Wayne Allyn Root Wayne Allyn Root Chief Executive Officer December 10, 2004 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to GWIN, Inc. and will be retained by GWIN, Inc. and furnished to the Securities and Exchange Commission upon request. EX-32 5 ex322.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER GWIN, INC. PURSUANT TO 18 U.S.C. SECTION 1350 I hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-QSB of GWIN, Inc. for the period ending October 31, 2004: (1) complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of GWIN, Inc. /s/ Jeffrey Johnson Jeffrey Johnson Chief Financial Officer December 10, 2004 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to GWIN, Inc. and will be retained by GWIN, Inc. and furnished to the Securities and Exchange Commission upon request. -----END PRIVACY-ENHANCED MESSAGE-----