UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 30, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________________ to ________________ LEGALPLAY ENTERTAINMENT INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Florida 000-29219 98-0199508 - ------------------------------- ------------------- ------------------- (State or other jurisdiction of (Commission File (IRS Employer incorporation or organization) Number) Identification No.) Suite 201, 1166 Alberni Street V6E 3Z3 Vancouver, British Columbia, Canada - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (778) 863-2961 (including area code) ---------- - ------------------------------------------- ----------------------------- (Former name, former address and former (Zip Code) 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 [ ] No [X] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Not applicable. APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 34,075,000 COMMON SHARES AS AT AUGUST 29, 2005. Transitional Small Business Disclosure Format: Yes [ ] No [X] (Check one) - -------------------------------------------------------------------------------- Page 2
LEGALPLAY ENTERTAINMENT INC. FORM 10-QSB PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statement of Operations. . . . . . . . . . . . . . . . . . . . F-6 Consolidated Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . F-7 Consolidated Statement of Stockholders' Equity. . . . . . . . . . . . . . . F-8 Notes to the Consolidated Financial Statements. . . . . . . . . . . . . . . F-10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION . . . . 14 ITEM 3. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . 15 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 17 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS . . . 18 ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . 18 ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . 19
- -------------------------------------------------------------------------------- Page 3 LEGALPLAY ENTERTAINMENT INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005 (Stated in US Dollars) (Unaudited) --------- - -------------------------------------------------------------------------------- Page 4
LEGALPLAY ENTERTAINMENT INC. CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS) - --------------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, 2005 2004 (UNAUDITED) $ $ - --------------------------------------------------------------------------------------------- Assets Current Cash 3,574 78 Accounts receivable 365 372 Prepaid expenses - 17,812 ============================================================================================= Total Current Assets 3,938 18,262 Property and Equipment - - Intangible Assets (Note 8) - 205,001 - --------------------------------------------------------------------------------------------- Total Assets 3,938 223,263 ============================================================================================= Liabilities Current Accounts payable and accrued liabilities 150,358 135,858 Due to related party (Note 4) 30,444 22,131 - --------------------------------------------------------------------------------------------- Total Liabilities 180,801 164,900 - --------------------------------------------------------------------------------------------- Stockholders' Equity Preferred Stock: Authorized: 5,000,000 shares with a par value of $0.01 Issued and outstanding: None Common Stock: Authorized: 100,000,000 shares with a par value of $0.01 Issued and outstanding: 33,175,000 (Dec 31 2003 - 26,025,000) 1,929,080 1,929,080 Treasury Stock, at cost - 27,000 shares (6,881) (6,881) Subscriptions Received 6,000 6,000 Other Comprehensive Income 6,564 18,981 Retain Deficit (1,888,817) (1,305,454) Deficit (222,809) (583,363) ============================================================================================= Total Stockholders' Equity (176,863) 58,363 - --------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity 3,938 223,263 =============================================================================================
SEE ACCOMPANYING NOTES - -------------------------------------------------------------------------------- Page F-5
LEGALPLAY ENTERTAINMENT INC. CONSOLIDATED STATEMENTS OF OPERATIONS (U.S. DOLLARS) (UNAUDITED) - --------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, - --------------------------------------------------------------------------------------------------------------- 2005 2004 2005 2004 (UNAUDITED) (UNAUDITED) $ $ $ $ - --------------------------------------------------------------------------------------------------------------- Revenues Tournament fees - 2,000 5,000 6,352 - --------------------------------------------------------------------------------------------------------------- Total Revenues - 2,000 5,000 6,352 Cost of Good Sold - 12,399 - 44,084 - --------------------------------------------------------------------------------------------------------------- Gross Margin - (10,399) 5,000 (37,732) Expenses Corporation promotion 1,657 3,904 1,657 9,910 Depreciation and amortization - 20,625 - 43,036 Insurance - 5,921 - 11,954 Management and Consultant fees 3,000 12,334 6,000 32,798 Office supplies and services (1,073) 5,180 1,245 16,116 Professional fees 1,891 15,605 14,194 39,769 Rent 642 4,740 1,284 9,630 Wages - 30,134 - 82,556 Fix asset write off - 205,000 Loss on assets dispostions - 8,688 - 8,688 Foreign exchange (596) (1,571) - --------------------------------------------------------------------------------------------------------------- Total Expenses 5,520 107,131 227,809 254,457 Income (Loss) from the period before Income Tax (5,520) (117,530) (222,809) (292,189) Income Tax Reduction of Income Tax on Loss Carryforward Application - - - - Net Income (Loss) for Year (5,520) (117,530) (222,809) (292,189) - --------------------------------------------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding 33,175,000 33,175,000 33,175,000 26,065,797 Dillutive effect of options - - - 1,098,380 - --------------------------------------------------------------------------------------------------------------- Weighted Average Number of Shares Outstanding Assuming Full Dilution 27,180,000 27,180,000 33,175,000 27,164,177 - --------------------------------------------------------------------------------------------------------------- Earnings (Loss) Per Shares Continuing operations (0) (0) (0) (0.01) Discontinued operations - - - - - --------------------------------------------------------------------------------------------------------------- Fully Diluted Earnings Loss Per Shares (0) (0) (0) (0.01) - ---------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES - -------------------------------------------------------------------------------- Page F-6
LEGALPLAY ENTERTAINMENT INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. DOLLARS) - ---------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 2005 2004 (UNAUDITED) $ $ - ---------------------------------------------------------------------------------------- Operating Activities Net income (loss) (222,809) (292,189) Adjustments to reconcile net income (loss) to net cash provided (used in) operating activities Items not involved cash: Loss from assets disposition 8,688 Non Cash payment for service (12,417) 6,000 Depreciation and amortization - 43,036 Stock based compensation - - Asset write off 205,001 Changes in non-cash working capital Accounts Receivable 7 573 Prepaid Expenses & Deposits 17,812 10,276 Accounts Payable & Accrued liabilities 14,500 533 Due to related party 1,832 - Due to non-related party (430) - Related to discontinued operations - - - ---------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Operating Activities 3,496 (223,083) - ---------------------------------------------------------------------------------------- Investing Activities Purchase of intangible assets - - Cash Proceeds from assets disposition - 5,460 Purchase of property and equipment - (5,810) - ---------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities - (350) - ---------------------------------------------------------------------------------------- Financing Activities Cash Proceeds from issuance of common stock - 1,000 Issue share to assigned director - 18,090 - ---------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities - 19,090 - ---------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash - - - ---------------------------------------------------------------------------------------- Inflow of Cash 3,496 (204,343) Cash, Beginning of Year 78 209,517 - ---------------------------------------------------------------------------------------- Cash, End of Year 3,574 5,174 - ---------------------------------------------------------------------------------------- Supplemental Disclosure of Non-Cash Transactions Reduction of subscriptions received by issuance of shares - - Assets received for share issued
SEE ACCOMPANYING NOTES - -------------------------------------------------------------------------------- Page F-7
LEGALPLAY ENTERTAINMENT INC. (FORMERLY POKER.COM, INC.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTH ENDED JUNE 30, 2005 (U.S. DOLLARS) Accumulated Other Comprehensive Total Common Stock Treasury Subscriptions Income Accumulated Stockholders' Shares Amount Stock Received (Loss) Deficit Equity - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 16,935,000 $1,469,235 - 22,480 4,755 $ (1,009,581) 486,889 - ------------------------------------------------------------------------------------------------------------------------------ Net income - - - - - 375,621 375,621 Foreign currency translation adjustment - - - - 13,629 - 13,629 - ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income - - - - 13,629 375,621 389,250 Shares issued for cash 15,000 2,250 - - - - 2,250 Subscription received - - - 10,000 - - 10,000 Stock option benefit - 118,920 - - - - 118,920 Repurchase of common stock for treasury - - (6,881) - - - (6,881) - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2001 16,950,000 1,590,405 (6,881) 32,480 18,384 (633,960) 1,000,428 - ------------------------------------------------------------------------------------------------------------------------------ Net loss - - - - - (63,864) (63,864) Foreign currency translation adjustment - - - - (1,155) - (1,155) - ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income - - - - (1,155) (63,864) (65,019) Shares issued for cash on exercise of options 225,000 33,750 - - - - 33,750 - ------------------------------------------------------------------------------------------------------------------------------ Balance, at December 31, 2002 17,175,000 1,624,155 (6,881) 32,480 17,229 (697,824) 969,159 - ------------------------------------------------------------------------------------------------------------------------------ Net loss - - - - - (607,630) (607,630) Foreign currency translation adjustment - - - - 1,752 - 1,752 - ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive - - - - 1,752 (607,630) (605,878) Stock option benefit - 11,800 - - - - 11,800 Recovery of investment - - - (32,480) - - (32,480) Shares issued for cash on exercise of options 600,000 12,000 - - - - 12,000 Shares issued for consulting services 2,250,000 50,125 - - - - 50,125 Shares issued for intangible assets 3,000,000 105,000 - - - - 105,000 (note 8(g)) Shares issued for software 3,000,000 54,000 - - - - 54,000 (note 8(h)) - ------------------------------------------------------------------------------------------------------------------------------ SEE ACCOMPANYING NOTES - -------------------------------------------------------------------------------- Page F-8 Balance, at December 31, 2003 26,025,000 1,857,080 (6,881) - 18,981 (1,305,454) 563,726 - ------------------------------------------------------------------------------------------------------------------------------ Net loss (583,363) (583,363) Foreian currency translation adjustment - - ------------------------------------------------------------------------------------------------------------------------------ Total comprehensive - - - - - (583,363) (583,363) Shares issued for cash on exercise of options 50,000 1,000 1,000 Subscription received - - - 6,000 - - 6,000 Shares issued for debt 7,000,000 70,000 70,000 Shares issued for accepting the position of Director and President 100,000 1,000 1,000 - ------------------------------------------------------------------------------------------------------------------------------ Balance, at December 31, 2004 33,175,000 1,929,080 (6,881) 6,000 18,981 (1,888,817) 58,363 - ------------------------------------------------------------------------------------------------------------------------------ Net loss (222,809) (222,809) Foreian currency translation adjustment (12,417) - ------------------------------------------------------------------------------------------------------------------------------ Balance, at June 30, 2005 33,175,000 1,929,080 (6,881) 6,000 18,981 (2,111,626) (176,863) - ------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES - -------------------------------------------------------------------------------- Page F-9 LEGALPLAY ENTERTAINMENT INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005 (Stated in US Dollars) (Unaudited) --------- Note 1 Consolidated Financial Statements --------------------------------- These unaudited consolidated financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. The Company's auditor, Amisano Hanson Chartered Accountants, has not reviewed the financial statements and Form 10-QSB, for the period ending June 30 2005. Note 2 Basis of Presentation These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information. These financial statements are condensed and do not include all disclosures required for annual financial statements. The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the Company's audited consolidated financial statements filed as part of the Company's December 31, 2004 Form 10-KSB. In the opinion of the Company's management, these financial statements reflect all adjustments necessary to present fairly the Company's consolidated financial position as at June 30th 2005, the consolidated results of operations for the three months and six months ended June 30th 2005 and 2004 and the consolidated cash flows for the six months ended June 30th 2005 and 2004. The results of operations for the three months and six months ended June 30th 2005 are not necessarily indicative of the results to be expected for the entire fiscal year. Note 3 Going Concern These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going-concern basis. This presumes funds will be available to finance on-going development, operations and capital expenditures and the realization of assets and the payment of liabilities in the normal course of operations for the foreseeable future. Management intends to raise additional capital through share issuances to finance operations and invest in other business opportunities. The Company has a working capital deficit of $176,863 at June 30th 2005, minimal other capital resources presently available to meet obligations which can normally be expected to be incurred by similar companies and has a loss of $222,809 for the six months ended June 30th 2005. These financial statements do not give effect to any adjustments to the amounts and classification of assets and liabilities, which might be necessary should the Company be unable to continue as a going concern. These factors raise substantial doubt about the Company's ability to continue as a going-concern, which is dependent on the Company's ability to obtain and maintain an appropriate - -------------------------------------------------------------------------------- Page F-10 LEGALPLAY ENTERTAINMENT INC. Notes to the Consolidated Financial Statements June 30, 2005 (Stated in US Dollars) (Unaudited) --------- level of financing on a timely basis and to achieve sufficient cash flows to cover obligations and expenses. Note 4 Due to Related Parties The Company owes a past President of the Company, Mark Glusing, CDN$15,465.26 in management fees. This debt is unsecured, non-interest bearing and has no specific terms for payment. The Company is in debt to Ubiquity Management Inc., a company under the control of Mark Glusing, for operational expenses paid on behalf of the Company. The debt owing is CDN$26,663.47 and was secured by a promissory note with 5% interest. The promissory note has since expired and the debt is still owing with no specific terms of repayment. Note 5 Contingent Liabilities (a) On December 2nd 2002, the Company entered into an "Assignment of Trademark Agreement" with Ala Corp. Ala Corp. was subsequently in default under this Agreement and on November 17th 2004, the Company instructed their solicitors to commence legal proceedings against Ala Corp. A writ was issued for the trademark dispute but was not pursued as it was consolidated into the Settlement Agreement entered into in 2005 (see "Subsequent Events" for additional details.) (b) The Company is a plaintiff in a lawsuit initiated by Uninet Technologies Inc. ("Uninet"), the master licensee, against ALA, the owner of the Poker.com URL/domain name. The master licensee sold a sublicense to the Company, granting it the exclusive use of the URL/domain name for a period of 99 years. The owner of the URL/domain name is accused of wrongfully breaching the license agreement by assigning the URL/domain name to a different company. On November 9, 2004, the Company entered into an Agreement with Uninet in regards to compensating Uninet for their agreement to prosecute the civil action (and advance legal fees) against Ala Corp and Communication Services Inc. The payment terms pursuant to the Agreement were as follows: 1. For prosecuting the action against Ala Corp., Uninet will be entitled to a 50% ownership in the rights of the URL "www.poker.com". Therefore, entitling Uninet to receive 50% of all revenue received by the Company in using and/or re-licensing the URL to a third party. 2. In the event that the Company is unable to continue to contribute fees to the proposed legal action to recover the rights to the URL "www.poker.com", but Uninet advances legal fees, the Company hereby agrees to assign 90% of its right, title and interest in and to the use of the URL to Uninet. In this regard, the Company irrevocably undertakes to allow Uninet to act for and/or represent the Company in order to continue prosecuting the joint action against CSI and any other action that Uninet believes should be taken against Ala Corp and/or CSI, for which costs Uninet will be responsible. The Company was unable to continue to contribute fees to the legal action to recover the URL, poker.com and, therefore, was unable to meet the terms and conditions of the November 9th 2004 Agreement with Uninet. - -------------------------------------------------------------------------------- Page F-11 LEGALPLAY ENTERTAINMENT INC. Notes to the Consolidated Financial Statements June 30, 2005 (Stated in US Dollars) (Unaudited) --------- As a result of Uninet's continuing funding of the legal fees, the Company entered into an Assignment Agreement with Uninet on December 29th 2004, whereby the Company assigned to Uninet 90% of the right, title and interest in and to the use of the URL, poker.com. In the event a settlement occurs between Ala Corp and/or Communication Services Inc., Uninet shall be entitled to receive 90% of the said settlement. In April 2005, the parties negotiated a Settlement Agreement. Please see "Subsequent Events" for additional details. (c) The Company will be liable for damages to Antico Holdings S.A. for failure to provide use of the URL, as per their agreement, and may not be able to collect the outstanding receivable of $591,048. (see "Subsequent Events" for additional information.) Note 6 Subsequent Events (i) The Company and SkillPoker were in default under the terms and conditions of the Blue Diamond Agreement who gave written notice to cancel the Agreement and take back the assignment of the inventions. On April 14th 2005, SkillPoker and Blue Diamond entered into an Assignment Agreement. For consideration of the sum of $1.00, SkillPoker assigned to Blue Diamond the inventions and patents known as: ------------- ------------- ------------ Country Serial Number Filing Date ------------- ------------- ------------ United States 60/393,736 July 8, 2002 ------------- ------------- ------------ United States 10/614,752 July 8, 2003 ------------- ------------- ------------ (ii) In 2004, Genius Goods Inc. and the Company agreed to transfer the URL, poker.cc, back to Genius Goods. The transfer took place on April 22nd 2005 and all dealings between the two companies have been subsequently terminated without further contingent liability. (iii) On April 25th 2005, the Company reached a Settlement Agreement with Ala Corp. regarding the dispute over the URL/domain name and trademark dispute. The Settlement Agreement outlined the following terms: - Communication Services Inc. will pay to the counsel for Uninet and LegalPlay, Kornfeld Mackoff Silber, in trust, US$435,000 for distribution to both Uninet and LegalPlay. - Ala Corp., and associated parties, agree to transfer to LegalPlay, or as they may direct, all of their right, title or interest in their 2,403,400 common shares of LegalPlay Entertainment. (iv) On April 25th 2005, the Company entered into a Settlement Agreement ("Agreement') with Communication Services Inc. ("CSI") and Ala Corp. The Agreement stated that the Company no longer had any interest in or claim to the domain name, www.poker.com or the U.S. Trademarks "Poker.com" and "Poker.com The Ultimate Gaming Connection Design". The domain name and trademarks are now the sole property of CSI. As a result of the Agreement, the Company received $42,000 and 250,000 common shares of LegalPlay. (v) As a result of the URL/domain name settlement, Antico Holdings S.A. ("Antico") was denied the use of the poker.com URL and suffered substantial damages. - -------------------------------------------------------------------------------- Page F-12 LEGALPLAY ENTERTAINMENT INC. Notes to the Consolidated Financial Statements June 30, 2005 (Stated in US Dollars) (Unaudited) --------- Antico refused to pay the Company the amount of $591,048 until the URL had been reinstated and had demanded restitution of the URL or damages. The parties agreed that the damages that Antico suffered substantially exceeded the amount that was owing to LegalPlay. However, Antico agreed that they would not commence legal action for damages on the condition that LegalPlay write off the debt of $591,048. (vi) After the settlement with Ala Corp., the Company had the financial resources to pay the accounting and legal fees incurred in completing regulatory filings for the SEC. On June 17th 2005, the Company filed an amendment to the Form 15-12(g) previously filed with the SEC on March 18th 2005. The amendment stated that the Company wished to withdraw their request to terminate their obligations as a reporting issuer. The company may not be successful in withdrawing their request, which is subject to filing the December 31 2004 Form 10-KSB and March 31 2005 and June 30 2005 Form 10-QSBs with the U.S. Securities and Exchange Commission in a timely manner. (vii) On July 15th 2005, the Company issued 900,000 common shares, representing 2.71%, of LegalPlay to the directors of the Company, as settlement for outstanding director's fees totaling US$9,000. The debt was settled at an exchange price per common share of $0.01 and the shares were issued under the conditions of Rule 144 and contain the appropriate restrictive legend. - -------------------------------------------------------------------------------- Page F-13 LEGALPLAY ENTERTAINMENT INC. QUARTERLY REPORT (SEC FORM 10-QSB) ITEM 2. MANAGEMENTS' DISCUSSION AND ANLAYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We continued to operate through our three subsidiary companies: Casino Marketing S.A., a Costa Rican registered company; 564448 BC Ltd., a British Columbia registered company; and Skill Poker.com Inc., a Washington state registered company incorporated January 29, 2003. Our current business strategy is to develop our own Poker software and market the software to on-line gaming sites worldwide. The litigation in relation to the domain name dispute relating to Poker.com continued during the first quarter of 2005 and a Settlement Agreement was reached between the parties in April 2005. We are in immediate need of further working capital and are considering options with respect to financing in the form of debt, equity or a combination thereof. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our financial statements at December 31, 2004. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, they may ultimately differ from actual results. Certain accounting policies involve significant judgments and assumptions by us, which have a material impact on our financial condition and results. Management believes its critical accounting policies reflect its most significant estimates and assumptions used in the presentation of our financial statements. Our critical accounting policies include revenue recognition, accounting for stock based compensation and the evaluation of the recoverability of long-lived and intangible assets. We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "special purpose entities". SIX-MONTH PERIOD ENDED JUNE 30 2005 RESULTS OF CONTINUING OPERATIONS The following table sets forth for the periods indicated selected information from LegalPlay Entertainment Inc.'s consolidated financial statements of operations: - -------------------------------------------------------------------------------- Page 14
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 - ---------------------------------------------------------------------------------------------------- 2005 2004 2005 2004 - ---------------------------------------------------------------------------------------------------- Tournament Income - 2,000 5,000 6,352 Cost of Goods Sold - 12,399 - 44,084 Expenses 5,520 107,131 227,809 254,457 Income (Loss) before discontinued operations (5,520) (117,530) (222,809) (292,189) - ---------------------------------------------------------------------------------------------------- Net Income (Loss) during the period (5,520) (117,530) (222,809) (292,189) ====================================================================================================
NET SALES. Net sales for the six months ended June 30 2005 were $5,000 compared to $6,352 for the six months ended June 30 2004. We expect to enhance our revenues through the consideration of other business opportunities. There can be no assurances we will be able to identify any business opportunities which will benefit us. These are forward-looking statements, particularly as related to the business plans of the Company, within the meaning of Section 27A of the Securities Act of 1933 and Sections 21E of the Securities Exchange Act of 1934 and are subject to the safe harbor created by these sections. Actual results may differ materially from our expectations and estimates. EXPENSES. Operating expenses for the six months ended June 30 2005 were $227,809 compared to $254,457 for the six months ended June 30 2004. The major expense item for the six months ended June 30 2005 was the write-off of the fixed asset of $205,000, as compared to $0 for the six months ended June 30, 2004. PROVISION FOR INCOME TAXES. No tax provision was made for the three and six months ended June 30, 2005. FINANCIAL CONDITION AND LIQUIDITY On June 30 2005, our net working capital was ($176,863) compared to a net working capital of $58,363 at December 31, 2004. At June 30 2005, the Company had cash and cash equivalents totaling $3,938 and compared to December 31, 2004 the Company had cash and cash equivalents totaling $18,262. We are in immediate need of further working capital and are considering options with respect to financing in the form of debt, equity or a combination thereof. Net cash used for operating activities for the six months ended June 30 2005 was $3,496. The decrease in cash was mainly due to developing and marketing the Skill Poker system, legal fees relating to the URL dispute and general office operations. Net cash used for investing activities for the six months ended June 30, 2005 was $0. Net cash provided by financing activities for the six months ended June 30, 2005 was $0. The Company's ability to continue as a going concern and fund operations through the remainder of 2005 is contingent upon its' ability to raise funds through equity or debt financing. ITEM 3. CONTROLS AND PROCEDURES. (i) We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in our Securities Exchange Act of 1934 reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, - -------------------------------------------------------------------------------- Page 15 including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Within 91 days prior to the date of this report, our management carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in connection with the filing of this Quarterly Report on Form 10-QSB for the period ended June 30 2005. (ii) There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any significant deficiencies or material weaknesses of internal controls that would require corrective action. - -------------------------------------------------------------------------------- Page 16 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 6, 2002, the domain www.poker.com was re-directed without our consent or knowledge by Ala Corp., a company registered under the laws of Antigua and whose principal is Liz Bryce of Vancouver, British Columbia, Canada. The domain was originally licensed from Ala Corp. to Uninet Technologies Inc. ("Uninet") in1999. Uninet immediately sub-licensed the domain to us. In turn, we sub-licensed the domain to Antico Holdings S.A. of Costa Rica for the operating casino and/or card rooms. We retained all other rights to the domain name including developing the web site as a portal, marketing casinos and card rooms and other gaming software. As of March 31st 2005, Liz Bryce, through Ala Corp., owned 1,297,900 shares of our common stock or 3.81% of our issued and outstanding common stock. In addition, Ms. Bryce's parents collectively own 1,105,500 shares or 3.24% of our common stock. Ms. Bryce, together with her parents, owns directly and indirectly, a total of 2,403,400 shares or 7.05% of our common stock. As part of the Settlement Agreement entered into between the Company and Ala Corp. on April 25th 2005, Liz Bryce and her parents agreed to transfer their shareholdings in LegalPlay Entertainment Inc. to the Company and Uninet Technologies Inc. Although contemplated in the agreements between Ala Corp. and Uninet and between Uninet and us, Ala Corp. failed to provide Uninet or us with any notice that it was redirecting the domain. As such, we were unaware of any allegations of contractual breach and management is of the opinion that all obligations, as set forth by the terms and conditions of the agreements, have been fulfilled and we are not aware of any reason for this dispute. We agreed with Uninet (who would be entitled to 50% of the URL if they co-joined an action) to jointly pursue all legal avenues available to retain the exclusive right to use www.poker.com and to enforce the provisions of the agreement between Ala Corp. and Uninet. After the domain was redirected, Ala Corp. transferred the registered owner of the domain to Communications Services Inc. ("CSI"), a company registered in Western Samoa and the registrar was changed from California based Verisign Inc. to Australia based Fabulous.com. Together with Uninet, we applied to The Internet Corporation for Assigned Names and Numbers (ICANN), a governing body which oversees domain registration and use issues, for the purpose of obtaining a decision on the basis of the wrongful redirection of www.poker.com. ICANN, however, ruled on January 21, 2003 that since the domain is now registered in the name of Communication Services Inc., it could only decide on a dispute between Ala Corp., the previous registered owner of the domain and CSI. Together with Uninet, we did not have any standing to apply for relief with ICANN since neither of us were ever the registered owner of the domain name. On February 28, 2003, together with Uninet, we sued CSI in the Supreme Court of British Columbia, Canada for a declaration that as a successor and assignee of Ala Corp., CSI is a trustee of the domain name for the benefit of Uninet and us: - an accounting for profits earned by Communication through the wrongful use of the domain an accounting for profits earned by CSI through the wrongful use of the domain name - a declaration that Ala and Communication are bound by the License Agreement between Ala and Uninet - a declaration that Uninet and us are entitled to the exclusive use of the domain name. - -------------------------------------------------------------------------------- Page 17 On November 3, 2003, we received notice from the Supreme Court of British Columbia that we were successful in establishing a substantial connection between the claims CSI was making and the jurisdiction in British Columbia. LegalPlay Entertainment Inc. can therefore pursue its case against CSI in British Columbia in connection with the litigation regarding the URL www.poker.com. Parallel arbitration proceedings against Ala Corp. remain under way. In 2004, together with Uninet, we proceeded to arbitration (in accordance with the terms and conditions of the agreement) with Ala Corp. in Vancouver, British Columbia, Canada to assert Uninet and our rights under the agreements. We selected the mutually acceptable arbitrator, Fasken Martineau DuMoulin LLP. In the meantime, together with Uninet, we requested that the current registrar, Fabulous.com impose a lock on the domain name, www.poker.com, pending the outcome of the Supreme Court action and the arbitration, which means the domain cannot be transferred to either another owner or to another registrar. As mentioned above, we sub-licensed the domain name to Antico Holdings S.A. ("Antico") of Costa Rica to use the domain for operating casinos and/or card rooms. Antico notified us that it had ceased all payments of royalties payable to us pending resolution to the dispute over the right to use the domain. It is anticipated that Antico will allege that we are responsible for damages incurred by Antico as a result of the dispute. We intend to defend any claims and will appropriately claim similarly against Uninet Technologies Inc., Ala Corp. and CSI. On April 25th 2005, the Company reached a Settlement Agreement with Ala Corp. regarding the dispute over the URL/domain name and trademark dispute. Please see Note 8, "Subsequent Events", in the financial statement notes for additional details. To the knowledge of management, no federal, state or local governmental agency is presently contemplating any proceedings against us. Other than as described above, no director, executive officer or affiliate thereof or owner of record or beneficially of more than five percent of our common stock is a party adverse to or has a material interest adverse to us in any proceeding. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION. None. - -------------------------------------------------------------------------------- Page 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit Number Description 2.1* On January 18th 2005, we filed an 8K accepting the resignation of Keith Andrews as a Director. 2.2* On February 16th 2005, we filed an 8K announcing the termination of our auditors, Pannell Kerr Forster and the appointment of Amisano Hanson Chartered Accountants as their replacement. 2.3* On March 10th 2005, we filed an 8K to announce the resignation of Gregory Cathcart as President, the appointment of Cecil Morris as President and the appointment of John Page as Director of the Company. 2.4* On July 11th 2005, we filed an 8K regarding a US$10,000 Promissory Note. 2.5* On July 18th 2005, we filed an 8K announcing 900,000 shares for debt issued at $0.01. 2.6* On August 10th 2005, we filed an 8K announcing a Settlement Agreement reached with Communication Services Inc. and Ala Corp. The 8K further announced a Promissory Note in the amount of CDN$6,000. 31.1 302 Certification for the Chief Executive Officer 31.2 302 Certification for the Chief Financial Officer 32.1 906 Certification for the Chief Executive Officer 32.2 906 Certification for the Chief Financial Officer
* Previously filed with the SEC. 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. LEGALPLAY ENTERTAINMENT INC. (Registrant) /s/ Cecil Morris Date: August 29, 2005 - ------------------------------- Cecil Morris Director, President / Secretary In accordance with the Securities Exchange Act this report has been signed below by the following person(s) on behalf of the registrant and in the capacities and on the dates indicated. /s/ Cecil Morris Date: August 29, 2005 - ------------------------------- Cecil Morris Director, President / Secretary /s/ John Page Date: August 29, 2005 - ------------------------------- John Page Director / Treasurer - -------------------------------------------------------------------------------- Page 19